FPC has reviewed developments since its last meeting on 21 June and assess the outlook for UK financial stability. Its conclusion was that ‘overall risks to UK financial stability from the domestic environment are broadly unchanged at a standard level’, though risks of greater vulnerabilities may loom on the horizon.
The headline statements were as follows:
- internationally, market measures of volatility and uncertainty are at historic lows. Major banks will be monitored for resilience against severe global and market shocks.
- Domestically, credit has broadly grown in line with nominal GDP, considered by FPC to be at a standard level. FPC will maintain the UK countercyclical capital buffer rate of 0.5%, with a likely increase to 1% in November.
- the rapid growth of consumer credit is a risk, with lenders underestimating losses that could be incurred in a downtown. To combat this, FPC is incorporating into its 2017 annual stress test an accelerated of analysis of credit loss that banks could incur in deep recession scenarios.
- the potentially disruptive effects of Brexit are being monitored, and where it is deemed disproportionately difficult for a firm itself to mitigate associated risks, like continuity of contracts between UK firms and counterparties in EU Member States, FPC is exploring other mitigating actions.
- IFRS 9 expects banks to set aside provisions for expected credit losses on all loans, not just where a loan is past due or in default.It is not expected to change cumulative losses incurred by banks incur during a stress episode, but it is hoped it will support financial stability.
- FPC has recommended to the PRA to set a minimum leverage requirement of 3.25%.
The Statement provides deeper analysis on consumer credit, Brexit and IFRS 9.