At its meetings on 20 and 27 November 2018, the Financial Policy Committee (FPC):
- Judged that the 2018 stress test showed the UK banking system was resilient to deep simultaneous recessions in the UK and global economies that were more severe overall than the global financial crisis and that were combined with large falls in asset prices and a separate stress of misconduct costs. All participating banks had remained above their risk-weighted capital and leverage hurdle rates and would be able to continue to meet credit demand from the real economy, even in this very severe stress.
- Reviewed preparations to mitigate disruption to the financial system that could arise from Brexit:
- It reviewed a ’Disorderly Brexit scenario’, with no deal and no transition period, that led to a severe economic shock. Based on a comparison of this scenario with the stress test, the FPC judged that the UK banking system would be strong enough to continue to serve UK households and businesses even in the event of a disorderly Brexit. The UK economic scenario in the 2018 stress test of major UK banks was sufficiently severe to encompass the outcomes based on ‘worst case’ assumptions about the challenges the UK economy could face in the event of a cliff-edge Brexit.
- It judged that major UK banks had sufficient liquidity to withstand a major market disruption.
- It agreed that most risks of disruption to the financial services that EU firms provided to UK households and businesses had been addressed, including through legislation. Further UK legislation, currently in train, would need to be passed to ensure the legal framework for financial services was fully in place ahead of Brexit.
- It welcomed the European Commission’s recent statement that it was willing to act to ensure that EU counterparties could continue to clear derivatives at UK central counterparties (CCPs) after March 2019. However, without greater clarity on the scope, conditions and timing of the prospective EU action, the contracts that EU members had cleared with UK CCPs would need to be closed out or transferred by March 2019 – a process that would need to begin in December 2018.
- It reiterated that, irrespective of the particular form of the UK’s future relationship with the EU, and consistent with its statutory responsibilities, the FPC would remain committed to the implementation of robust prudential standards in the UK. This would require maintaining a level of resilience that was at least as great as that currently planned, which itself exceeded that required by international baseline standards, as well as maintaining more generally the UK authorities’ ability to manage UK financial stability risks.
- Continued to judge that, apart from those related to Brexit, domestic risks remained at a standard level overall. Lender risk appetite was strong but, reflecting uncertainty, demand for credit had been muted. It agreed that risks to UK financial stability from global debt vulnerabilities remained material.
- Maintained the UK countercyclical capital buffer (CCyB) rate at 1%. It stood ready to move the UK CCyB rate in either direction as the risk environment evolved.
- Noted that leveraged lending to businesses had grown rapidly, both globally and, more recently, in the UK. Strong creditor risk appetite, including for securitisations of leveraged loans, had loosened underwriting standards materially. However, UK banks’ holdings of these securitisations were very small and their aggregate exposures to leveraged lending were covered in the Bank’s 2018 stress test.
- Completed an in-depth assessment of the risks associated with leverage from the use of derivatives in the non-bank financial system. It judged that risks of forced sales to meet derivative margin calls currently appeared limited. However, more comprehensive and consistent monitoring by authorities would be needed to keep this under review.
- Agreed that it was not necessary to recommend any changes to the regulatory perimeter at this stage, based on its 2018 annual review. It noted that it had already started an in-depth assessment of risks in leveraged loan markets, given the rapid growth of leveraged lending.
Record of the Financial Policy Committee meetings held on 20 and 27 November 2018