BOE FSR: UK banking system remains resilient to a wide range of possible economic outcomes

The Bank of England (BOE) published its Financial Stability Report (FSR), with the key takeaways noted below.

Financial system has so far provided that support, reflecting the resilience that has been built up since the global financial crisis.

UK banking system remains resilient to a wide range of possible economic outcomes.

Headwinds to banks’ capital ratios are therefore anticipated over coming quarters as unemployment rises, business insolvencies rise from current low levels, and risk weights on banks’ exposures increase.

Major UK banks can absorb credit losses in the order of £200 billion, much more than would be implied if the economy followed a path consistent with the MPC’s central forecast.

The FPC expects banks to use all elements of capital buffers as necessary, to continue to support the economy.

The FPC is updating its guidance on the path for the UK countercyclical capital buffer (CCYB) rate, it now expects this rate to remain at 0% until at least 2021 Q4.

Any subsequent increase in CCYB is not expected to take effect until 2022 q4 at the earliest

Eventual pace of return to a standard 2% UK CCYB rate will depend on banks’ ability to rebuild capital while continuing to support households and businesses.

Cutting support to the economy to avoid the use of capital buffers would be costly for the wider economy and consequently for banks themselves.

Most risks to the UK financial stability that could arise from disruption to the provision of cross-border financial services at the end of the transition period have been mitigated

Irrespective of the particular form of the UK’s future relationship with the EU, and consistent with its statutory responsibilities, the FPC remains committed to the implementation of robust prudential standards in the UK.

Some market volatility and disruption to financial services, particularly to EU-based clients, could arise.

The FPC will report conclusions on mortgage market guidance in 2021.

Some markets might be vulnerable to repricing if corporates’ credit fundamentals were to deteriorate and risk appetite fell.

Market reaction

GBP/USD holds onto gains above 1.3300 on the FSR release, shrugging-off no-deal Brexit fears.

The spot was last seen trading at 1.3320, adding 0.21% on the day.