Since the previous Report, prices of risky assets rose and balance sheets across the financial system strengthened. Recently, 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:
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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.
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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 per cent until 1 January 2015, rising thereafter to reach an LCR of 100 per cent 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.
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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.
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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.
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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.
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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.
Executive summary
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