FPC outlines approach to setting countercyclical capital buffer

FPC has published its approach to setting the countercyclical capital buffer (CCyB).

Its approach is based on six core principles:

  • Ensuring that the UK banking system is better able to absorb shocks without an unwarranted restriction in essential services, such as the supply of credit, to the UK real economy.
  • Taking into account the extent of financial vulnerabilities and the risk that the banking system could experience losses on its UK exposures.
  • When financial vulnerabilities are building up, FPC expects to increase the UK CCyB rate. The pace of adjustment will be determined with reference to the level and growth of financial vulnerabilities, and the economic cost of building resilience.
  • Building resilience by increasing the UK CCyB rate may also restrain credit growth and reduce the future build-up of financial cycle vulnerabilities, but this is not the primary objective of any increase.
  • In the current context of its overall capital strategy, FPC judges that the neutral rate for the UK CCyB is around 2%.
  • Should vulnerabilities abate, or crystallise, FPC would consider reducing the UK CCyB rate. FPC would reduce it if necessary to zero, if it anticipates that the banking system may face losses that could otherwise cause it to restrict lending by more than was warranted by the macroeconomic environment, thereby amplifying potential damage to the economy.

Laura Wiles