BoE publishes Financial Stability Report

BoE has published Financial Stability Report no. 41  which sets out the views of the Financial Policy Committee (FPC)  on the current financial stability of the UK, including an assessment of the risks to, and resilience of, the UK financial system and its recommendations to reduce those risks.

The FPC has assessed the overall risks in to the UK financial system and concluded that they are at a “standard level”  but with some “pockets” which should be watched, specifically lending in the form of consumer credit, which is rapidly increasing. It is also worried that lenders may be placing too much emphasis on the recent performance of  loans in benign conditions.

Internationally, the report notes there are a range of possible outcomes to the Brexit negotiations, and says that some global risks have not crystallised.

It is also concerned that the downside risks that are implied by very low long-term interest rates have not been fully reflected in measuring market volatility and the valuation of some asses, such as corporate bonds and UK commercial real estate.

FSC has decided:

  • to increase the UK’s countercyclical capital buffer rate to 0.5%, from 0%, then raising it to 1% at its November meeting;
  • to accelerate the assessment of stressed losses on consumer credit lending in the Bank’s 2017 annual stress test in order to ascertain whether any additional resilience is required against this lending. FPC also supports PRA and FCA’s plan to publish their expectations of lenders in the consumer credit market in July;
  • to clarify its existing insurance measures in the mortgage market, designed to prevent excessive growth in the number of highly indebted households and to promote consistency across lenders in how they assess whether new mortgage borrowers can afford repayments;
  • as per its previous commitment, to restore the level of resilience delivered by its leverage ratio standard to the level it delivered in July 2016. FPC intends to set the minimum leverage requirement at 3.25% of non-reserve exposures, subject to consultation;
  • to oversee contingency planning to mitigate risks to financial stability that Brexit brings; and
  • to set out the essential elements of the regulatory framework for maintaining cyber resilience. It will now monitor that each element is being fulfilled by the relevant UK authorities.