29 November 2012

BoE publishes Financial Stability Report, November 2012

This Report covers the interim Financial Policy Committee's assessment of the outlook for the stability and resilience of the financial sector at the time of preparation of the Report, and the policy actions it advises to reduce and mitigate risks to stability.

In June 2010, the Chancellor of the Exchequer set out a plan for fundamental changes to the system of UK financial regulation. In July 2010 and February 2011, the Government published consultation documents on the proposed changes, and in January 2012 introduced the Financial Services Bill to Parliament. The legislation will establish a Financial Policy Committee (FPC). The responsibility of the Committee will relate primarily to the identification of, monitoring of, and taking of action to remove or reduce, systemic risks with a view to protecting and enhancing the resilience of the UK financial system, and subject to that, supporting the economic policy of Her Majesty’s Government, including its objectives for growth and employment.

The Government intends the FPC to be a Committee of the Bank of England’s Court of Directors, and in February 2011 the Court created an interim FPC to undertake, as far as possible, the future statutory FPC’s macroprudential role. Although lacking the proposed statutory powers of Direction and Recommendation of the statutory FPC, the interim FPC contributes to maintaining financial stability by identifying, monitoring and publicising risks to the stability of the financial system and advising action to reduce and mitigate them. It also carries out preparatory work and analysis in advance of the creation of the permanent FPC.

The proposed legislation will require the FPC to publish a Financial Stability Report twice a year. This Financial Stability Report was produced under the guidance of the interim FPC. It covers the Committee’s assessment of the outlook for the stability and resilience of the financial sector at the time of preparation of the Report, and the policy actions it advises to reduce and mitigate risks to stability.

The interim Financial Policy Committee agreed the following policy recommendation at its meeting on 21 November: The Committee recommends that the Financial Services Authority (FSA) takes action to ensure that the capital of UK banks and building societies reflects a proper valuation of their assets, a realistic assessment of future conduct costs and prudent calculation of risk weights. Where such action reveals that capital buffers need to be strengthened to absorb losses and sustain credit availability in the event of stress, the FSA should ensure that firms either raise capital or take steps to restructure their business and balance sheets in ways that do not hinder lending to the real economy.

Full report

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