Friday, 28 June 2013

Bank of England Financial Stability Report, June 2013 - Executive Summary

By the Bank of England (BOE)

For much of the period since the previous Report, prices of risky assets rose and balance sheets across the
financial system strengthened. More recently, however, asset prices have fallen and financial markets have
been volatile, reflecting shifting expectations of the path of monetary policy in some of the major advanced
economies. The outlook for financial stability is still clouded by risks from a weak and uneven global
recovery, and imbalances in the euro area. In the near term, risks could crystallise if global long-term
interest rates were to rise abruptly from current still historically low levels, or if credit spreads were to widen.
Further out, risks could accumulate if a search for yield intensifies and assets become progressively
mispriced. Market participants have increasingly highlighted concerns about operational risk, including
threats of cyber attack. And confidence in the financial system remains fragile with weak credit growth.

In light of the outlook for financial stability and the actions under way to enhance the capital adequacy of
the UK banking system, at its June meeting the Financial Policy Committee (FPC) agreed the following new
recommendations:

• The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), with other Bank
staff, should provide an assessment to the FPC of the vulnerability of borrowers and financial institutions
to sharp upward movements in long-term interest rates and credit spreads in the current low interest
rate environment. They should each report back to the FPC in September 2013.

• In assessing the liquidity of banks and building societies, the PRA should employ, among other measures,
the Liquidity Coverage Ratio (LCR) as defined in the EU’s implementation of the Basel standard. The
minimum requirement should be set at an LCR of 80% until 1 January 2015, rising thereafter to reach an
LCR of 100% on 1 January 2018. The PRA should consider whether any additional requirements are
needed where there are idiosyncratic liquidity risks not captured by the LCR framework or where the
adjustments to capital positions described in the existing capital recommendations have not been
implemented.

• The PRA should continue to work with the banking industry to ensure greater consistency and
comparability of the Pillar 3 disclosures of the major UK banks and building societies, including
reconciliation of accounting and regulatory measures of capital.

• The PRA should ensure that all major UK banks and building societies comply fully with the
October 2012 recommendations of the Enhanced Disclosure Task Force (EDTF) upon publication of their
2013 annual reports.

• The PRA should assess the feasibility of the major UK banks and building societies calculating their
regulatory capital ratios under end-point Basel III definitions using the standardised approach to credit
risk. The PRA should report back to the FPC for its 2013 Q4 meeting.

• HM Treasury, working with the relevant government agencies, the PRA, the Bank’s financial market
infrastructure supervisors and the FCA should work with the core UK financial system and its
infrastructure to put in place a programme of work to improve and test resilience to cyber attack.
The Committee also reaffirmed a number of the recommendations made by the interim Committee, as
outlined in Section 4.

Read the full report here

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