## 1gbrea2022005

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### Operationalizing the framework
- The United Kingdom assigned the Bank of England (BOE) a clear financial stability mandate after the Global Financial Crisis (GFC) of 2007–09 and created the Financial Policy Committee (FPC) to set macroprudential policy.
- The United Kingdom shifted to a “twin peaks” model of financial oversight.
- The 2016 FSAP concluded the new framework appeared appropriate; the 2021 FSAP reviews its performance through Brexit and the COVID-19 pandemic.
- The FPC runs state-of-the-art, collaborative processes for monitoring stability risks and evaluating policies.
- Cooperation among authorities is strong: the FPC receives substantial support from the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA and FCA provide data and information, participate in regular reviews of the regulatory perimeter, and are members of the FPC.
- BOE staffing for financial stability:
  - Financial Stability Strategy and Risk (FSSR) directorate: 155 staff in 2021; houses the FPC secretariat.
  - Financial market infrastructure directorate: 124 staff.
  - Central bank digital currencies (CBDC) unit: 21 staff; launched in 2021.
  - International policy unit: 64 staff; co-managed with the Deputy Governor for Monetary Policy.
  - Deputy Governor for Financial Stability manages four groups with more than 350 full-time staff.
- Prudential Policy Directorate (PPD) within the PRA: staff of roughly 180.

### Mandate clarity and HMT remit issues
- Key institutional mandates:
  - FPC primary objective: contribute to the Bank of England’s financial stability objective by identifying, monitoring, and taking action to reduce systemic risks and protect and enhance resilience of the U.K. financial system.
  - FPC secondary objective (subject to the first): support the Government’s economic policy as defined by the Chancellor in an annual remit letter to the FPC.
  - PRC mandate aligned with BOE’s financial stability objective; PRC responsible within the BOE for exercising the Bank’s function as the PRA.
  - FCA: no standalone financial stability mandate but CEO is a voting FPC member and the FCA contributes to systemic-risk monitoring.
  - HMT determines macroprudential oversight structure and uses the Chancellor’s annual remit and recommendations letter; 2020 remit letter clarified the FPC should “routinely assess whether it can take actions” to support the secondary objective where not conflicting with the primary objective.
- Recommendation (priority/timing from FSAP excerpt):
  - HMT should reaffirm the primacy of the FPC’s financial stability objective and consider prioritization of recommendations to the FPC under its objectives as part of the remit process. NT — HMT
  - HMT should be clear about the scope of expertise sought from the FPC’s external members as a group. MT — HMT
- FSAP view:
  - The FPC’s overwhelming focus should be on its primary objective; the primary objective requires most of the committee’s time and expertise.
  - An increase in the number of issues HMT recommends the FPC consider under its secondary objective could risk diluting the committee’s focus.

### CCyB (Countercyclical Capital Buffer) actions, indicators, and trajectory
- CCyB objective: ensure the banking system can withstand stress without restricting essential services, such as the supply of credit to the real economy.
- The FPC’s CCyB is informed by 17 core indicators across three groups:
  1. Nonbank balance sheet stretch.
  2. Conditions and terms in markets.
  3. Bank balance sheet stretch.
- Timeline of notable CCyB decisions (preserve numeric values exactly):
  - Announced increase to 0.5 percent in March 2016.
  - Lowered the CCyB to 0 percent on July 1, 2016 (post-U.K. referendum to leave the EU); the increase to 0.5 percent never came into effect.
  - June 2017: increased the CCyB rate to 0.5 percent.
  - November 2017: increased the CCyB rate to 1 percent; the increases took full effect in November 2018.
  - December 2019: stated CCyB should be 2 percent in a standard risk environment and announced increase to 2 percent to take effect 12 months hence.
  - Pandemic response: lowered the CCyB to 0 percent in March 2020.
  - December 2021: raised the CCyB to 1 percent, effective December 13, 2022.
- Forward guidance:
  - If the U.K. economic recovery proceeds broadly in line with the MPC’s central projections and the financial stability outlook does not change, the FPC would expect to increase the rate to 2 percent in the second quarter of 2022.
- FSAP position:
  - Supports gradual reestablishment of the CCyB in measured steps to the 2 percent standard risk environment level.
- Stylized financial cycle and expected CCyB stance by stage:
  - Stage 1 (risks very subdued): expect CCyB rate of 0 percent.
  - Stage 2 (standard risk environment): FPC intends positive CCyB and currently expects it would be in the region of 2 percent.
  - Stage 3 (risks become elevated): FPC would expect to increase CCyB above 2 percent.
  - Stage 4 (risks crystallize): FPC may cut the CCyB rate, including, where appropriate, to 0 percent.

### Mortgage market measures and household indebtedness
- FPC mortgage-market measures since 2014:
  - A floor on the stressed rate buffer that mortgage originators should apply in the mortgage affordability test (300 basis points recommended in June 2014; clarified December 2017 to apply to the mortgage reversion rate).
  - A cap on the share of new mortgages that each lender can issue at high loan-to-income (LTI) multiples: limit of 15 percent of new mortgages at LTI ratios at or above 4.5 times (implemented in PRA Rulebook, later amended to a four-quarter rolling limit).
- Mortgage market and household statistics (preserve numeric values exactly):
  - Mean loan-to-income (LTI) ratio has increased in recent months to a historical high.
  - Increase in lending is mostly driven by lending at LTI ratios below 4.5 times, but above 4 times.
  - Lending above the 4.5 threshold has not increased.
  - Lending at LTI ratios above 5.0 times has declined.
  - Historically, about three quarters of all borrowers refinance their mortgages within six months from the reset onto another promotional interest rate.
  - About one quarter of household mortgage contracts reset annually.
- House price developments (through September 2021):
  - House prices rose at an annual rate of 11.8 percent through September 2021.
  - The highest regional rate was 16.8 percent in the northwest region.
  - Price growth in London was 2.8 percent.
  - The house price-to-earnings ratio for buyers was 6.7 times in the third quarter of 2021, surpassing the previous historical high of 6.4 times in 2007 nationwide.
- FPC actions and FSAP caution:
  - December 2019: FPC judged measures should remain through the cycle; benefits outweigh limited macroeconomic costs.
  - December 13, 2021: FPC noted the LTI flow limit likely plays a stronger role than the affordability test when house prices rise rapidly; FPC intended to consult on withdrawing its affordability stress test in the first half of 2022.
  - FSAP caution: Removal of the affordability stress test at this juncture requires careful consideration because the mean LTI ratio has increased to a historical high and housing prices are rising fast.

### Responses to Brexit and COVID-19: coordination and crisis management
- Brexit response:
  - BOE activated a framework to coordinate policy actions following the Brexit referendum: lowered CCyB to 0 percent; put in place a crisis management framework within the BOE; compared a “worst case” Brexit scenario to its Annual Cyclical Scenario (ACS) stress test.
  - Prior to the end of the Brexit transition period, the FPC used a checklist to monitor mitigation of key risks.
- COVID-19 pandemic response (selected actions and outcomes):
  - BOE, PRA, and FCA shared dashboards, indicators, and analysis; authorities acted decisively to bolster banks’ capital.
  - FPC lowered the CCyB to zero and gave forward guidance that it would remain at that level for at least 24 months.
  - PRC/PRA took supporting measures including requests to major U.K. banks to suspend distributions.
  - Guidance on risk assessment and modelling to lower procyclicality of loan loss provisioning and risk weights; expanded transitional arrangements for expected credit loss (ECL) accounting.
  - FPC used stress tests, including a reverse stress test in summer 2020: calculated economic paths that would deplete banks’ regulatory capital buffers by about 5 percent and concluded such depletion would occur only under very severe economic conditions (cumulative loss of economic output associated with Covid would be twice as large as the MPC’s August 2020 projection).
  - May and December 2020 assessments: FPC judged banks had sufficient capital buffers to lend in and remain resilient across a wide range of outcomes.
- Operational relief and supervisory adjustments:
  - Cancelled the 2020 annual bank solvency stress test and postponed other supervisory exercises; provided allowances in reporting and relief on operational burdens.
  - PRA issued guidance on ECL modelling and postponed implementation of Basel 3.1 by one year; excluded Bounce Back Loan Scheme (BBLS) loans from leverage ratio denominator.
- FSAP view:
  - Support measures yielded positive results to date, but data remain unclear about underlying concerns; macroprudential vigilance is required as support measures are removed.
  - Recommendation: FPC should continue to ensure timely information-sharing protocols with the PRA and FCA regarding measures in development with potential systemic implications.

### Nonbank financial institutions (NBFIs), market-based finance, and data gaps
- Shift in emphasis:
  - Since the mid-2010s the FPC has investigated risks from NBFIs, devoted resources to systemic risks from climate change and new financial technologies, and shifted emphasis from banking-focused regulation toward NBFIs and market-based finance.
- RBB exercise and monitoring:
  - The FPC’s Risks Beyond Banking (RBB) exercise (annual since 2014) assesses roughly 40 nonbank activities for fragility and transmission risk; the exercise takes six months and culminates in a comprehensive report to the FPC.
  - RBB outputs feed deep dives (typically six to nine months) and close monitoring; deep-dive topics included investment funds (November 2015), market liquidity (July 2016), insurance companies (November 2016), derivatives (November 2017), nonbank leverage (November 2018), and leveraged loans (July 2019).
- Critical data gaps identified (preserve numeric and descriptive content exactly):
  - Flow of funds statistics remain incomplete; ONS published over 30 experimental articles since 2016 and quarterly balance sheet data from the Financial Services Survey for nonbanks is now published, but remaining gap: granular data on domestic and foreign NBFIs.
  - Activities of NBFIs and buy-to-let mortgage market remain areas of unfinished work.
  - The FPC’s July 2021 assessment prioritized collecting better data on asset management firms’ use of leverage, potential losses, and potential liquidity demands; margin practices in noncleared derivatives markets.
  - BOE and FCA have not yet used special powers to call for new data collections, partly because the international nature of market-based finance limits value of domestic-only collections.
- Use of external and novel data sources:
  - BOE uses commercial datasets and developed proof-of-concept monitoring tools using EMIR trade repository data; BOE researchers and FCA analysts use internet search data, credit derivatives data, MiFID2 transaction reporting data, and weekly high-frequency indicators produced during the pandemic.
- Recommendation:
  - The FPC should continue to advocate and support efforts to promote international cooperation to ensure the United Kingdom and relevant cross-border authorities have necessary data to monitor and evaluate NBFI risks. NT — FPC, FCA, with other agencies
  - The FPC should explain its approach to evaluating data availability for systemic risk oversight. MT — FPC

### Open-ended funds, liquidity mismatch, and international coordination
- Nature of risk:
  - Liquidity mismatch in open-ended funds: mismatch between daily redemptions and less liquid portfolio assets can create first-mover advantages and fire-sale dynamics.
- Key empirical and policy points:
  - BOE-FCA March 2021 survey: covered 51 firms and 272 funds with total assets under management of £137 billion (fourth quarter of 2019 to second quarter of 2020); most funds experienced net outflows; most funds used swing pricing and increased frequency; approaches to swing pricing varied widely.
  - BIS observations (December 2021): investors more likely to redeem in response to poor performance; redemption spillovers across funds with common holdings; bonds owned by open-ended funds performed worse and had worse liquidity than similar bonds not owned by these funds.
  - FCA created a new authorized fund vehicle for highly illiquid assets and proposed minimum notice periods for investor redemptions for open-ended funds investing in real estate.
  - FCA final rules in October 2021 for Long-Term Asset Funds (LTAFs): redemption policies consistent with liquidity profile, including no more frequently than monthly dealing and minimum 90-day notice on redemptions, and an annual formal assessment by the governance body on liquidity management and market integrity.
- Sizes and domicile notes (preserve numeric values exactly):
  - Only 18 MMFs with about £21 billion (as of 30 December 2021) in assets are domiciled in the United Kingdom and subject to FCA oversight, roughly 8 percent of all sterling MMF assets under management.
  - Open-ended fund sample in BOE-FCA survey: total assets under management of £137 billion.
- Recommendations and international coordination:
  - FSAP endorses the FPC’s December 2019 FSR principles and July 2021 recommendations on liquidity mismatch.
  - Further measures (e.g., redemption notice periods) should consider liquidity of underlying assets; reform requires international collaboration through the FSB and IOSCO.
  - An effective liquidity classification framework could help determine appropriate redemption terms; its effectiveness depends on global application.
  - FSAP supports the new LTAF vehicle with proposed redemption notice periods and the BOE/FCA principles for liquidity classification and swing pricing.

### FPC process, stress testing, and supervisory cooperation
- FPC meeting cycle and processes:
  - Assesses financial stability at least quarterly in meeting rounds spanning at least four weeks; rounds include “Briefing”, “Roundtable”, “Issues” meetings, and a Policy Meeting guided by an annotated agenda.
  - FSSR prepares a round plan; Policy Coordination Committee (PCC) coordinates Bank-wide inputs; secretariats share FPC and PRC briefing materials while avoiding firm-specific disclosures outside the PRA.
  - Layered communications approach: Layer 1 (public reassurance), Layer 2 (visual non-technical explanations), Layer 3 (full FSR targeting technical audience).
- Stress testing:
  - Stress-testing central to FPC monitoring; first system solvency stress test in 2014; annual test assesses individual banks and the system and informs CCyB decisions.
  - Biennial exploratory scenarios introduced for longer-term challenges (fintech, low rates, liquidity stress, climate).
  - Pandemic-era adaptations: cancelled 2020 annual solvency test and ran desktop and reverse stress tests; reverse stress test in August 2020 suggested depleting buffers by about 5 percent would require extremely severe economic conditions.
  - Outcome of the 2021 bank solvency stress test published December 13, 2021; FPC judged U.K. banking system remains resilient to a much more severe downturn than the MPC forecasted.
- Interagency cooperation and information sharing:
  - Informal mechanisms complement formal institutional mechanisms; overlapping memberships (e.g., BOE Deputy Governors on both FPC and PRC) facilitate information sharing.
  - BOE and FCA have MoUs with overseas counterparts; after the Brexit referendum the FCA signed over 80 MoUs with EEA and non-EEA supervisory authorities.
  - The FPC has not felt it necessary to use its formal information-gathering powers to date, relying instead on collaboration and ad-hoc data requests.

### Main recommendations and priorities (excerpted)
- SEC 1 (near-term and medium-term priorities)
  - Reaffirm the primacy of the FPC’s financial stability objective and consider prioritization of recommendations to the FPC under its objectives as part of the remit process. NT — HMT
  - The FCA’s role in supporting systemic risk monitoring, oversight, and risk analysis through the FPC should grow as NBFI risks evolve; the FPC must boost its own coverage of these issues. MT — FCA
  - HMT should be clear about the scope of expertise sought from the FPC’s external members as a group. MT — HMT
- SEC 2
  - The FPC should continue to advocate and support efforts to promote international cooperation and ensure authorities have data and information needed to monitor and assess risks, particularly for NBFIs. NT — FPC, FCA, with other agencies
  - The FPC should explain its approach to evaluating data availability for systemic risk oversight. MT — FPC
- SEC 3
  - The FPC should ensure timely information sharing protocols with the PRA and FCA regarding measures in development that may have systemic financial stability implications. NT — FPC, PRC, FCA
  - Removal of the FPC’s affordability stress test requires careful consideration given rising mean LTI and fast-rising housing prices. NT — FPC
  - The FPC and U.K. authorities should continue international work to strengthen resilience of the open-ended fund sector in line with FPC’s 2019 principles and 2021 recommendations; an effective liquidity classification framework could help determine redemption terms. NT — FPC

*Prepared by Monetary and Capital Markets Department as part of the IMF Financial Sector Assessment Program (FSAP) for the United Kingdom.*

### EXECUTIVE SUMMARY __________________________________________________________________________________ 6

### 1gbrea2022005 - EXECUTIVE SUMMARY __________________________________________________________________________________ 6

### Operationalizing the framework
- The United Kingdom assigned the Bank of England (BOE) a clear financial stability mandate after the Global Financial Crisis (GFC) of 2007–09 and created the Financial Policy Committee (FPC) to set macroprudential policy.
- The United Kingdom shifted to a “twin peaks” model of financial oversight.
- The 2016 FSAP concluded the new framework appeared appropriate; the 2021 FSAP reviews its performance through Brexit and the COVID-19 pandemic.
- The FPC runs state-of-the-art, collaborative processes for monitoring stability risks and evaluating policies.
- Cooperation among authorities is strong: the FPC receives substantial support from the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The PRA and FCA provide data and information, participate in regular reviews of the regulatory perimeter, and are members of the FPC.

### Mandate clarity and HMT remit issues
- Recommendation: Her Majesty’s Treasury (HMT) should reaffirm the primacy of the FPC’s financial stability objective and consider financial stability tradeoffs when assigning new tasks under the FPC’s secondary objective.
- HMT introduced language in the 2020 remit letter clarifying that the FPC “should... routinely assess whether it can take actions” to support its secondary objective where doing so does not conflict with its primary objective.
- The FSAP recognizes the FPC has not weakened focus on its primary objective despite changes in remit language, but stresses the primary objective requires most of the committee’s time and expertise.

### CCyB (Countercyclical Capital Buffer) actions and trajectory
- The FPC has consistently taken a thoughtful approach to the design and implementation of the CCyB.
- Key historical actions:
  - Announced increase to 0.5 percent in March 2016.
  - Lowered the CCyB to 0 percent three months later (post-U.K. referendum to leave the EU).
  - December 2019: stated CCyB should be 2 percent in a standard risk environment and announced increase to 2 percent to take effect 12 months hence.
  - Once the pandemic hit, the FPC lowered the CCyB to 0 percent.
  - December 2021: raised the CCyB to 1 percent, effective December 2022.
- Forward guidance: If the U.K. economic recovery proceeds broadly in line with the MPC’s central projections and the financial stability outlook does not change, the FPC would expect to increase the rate to 2 percent in the second quarter of 2022, consistent with its policy of raising the CCyB in measured steps to the 2 percent standard risk environment level.

### Mortgage market measures and household indebtedness
- FPC measures since 2014 include:
  - A limit on the flow of high loan-to-income (LTI) mortgages.
  - An affordability stress test on interest rates.
- The FSAP team agrees these measures have prevented lenders from loosening lending standards and increasing the number of more highly indebted households.
- December 2019: FPC argued benefits outweigh limited macroeconomic costs and recommended measures remain through the cycle.
- December 13, 2021: FPC noted the LTI flow limit is likely to play a stronger role than the affordability test in guarding against increased aggregate household indebtedness when house prices rise rapidly.
- FPC intends to consult on withdrawing its affordability stress test in the first half of 2022, noting the LTI flow limit and the FCA’s Mortgage Conduct of Business framework should deliver appropriate resilience.
- FSAP caution: Removal of the affordability stress test at this juncture requires careful consideration because the mean LTI ratio has increased to a historical high, mostly driven by increased lending at LTI ratios below 4.5 times but above 4.0 times, and housing prices are rising fast.

### Responses to Brexit and COVID-19
- BOE activated a framework to coordinate policy actions following the Brexit referendum:
  - Lowered CCyB to 0 percent.
  - Put in place a crisis management framework within the BOE.
  - Compared a “worst case” Brexit scenario to its Annual Cyclical Scenario (ACS) stress test.
- Prior to the end of the Brexit transition period, the FPC used a checklist to monitor mitigation of key risks.
- At the onset of the pandemic, the BOE, PRA, and FCA shared dashboards, indicators, and analysis; authorities responded decisively to bolster banks’ capital:
  - FPC lowered the CCyB to zero.
  - PRC took supporting measures including requests to major U.K. banks to suspend distributions.
  - Guidance on risk assessment and modelling to lower procyclicality of loan loss provisioning and risk weights.
  - Expanded transitional arrangements for implementation of expected credit loss (ECL) accounting.
  - FPC used stress tests, including a reverse stress test in summer 2020, supporting the judgment that U.K. banks in aggregate were resilient to the unfolding stress.
- Support measures through the pandemic have yielded positive results, but data remain unclear about underlying concerns; macroprudential vigilance is required as support measures are removed.

### Nonbank financial institutions (NBFIs), market-based finance, and data gaps
- Since the mid-2010s the FPC has investigated risks from NBFIs, devoted resources to systemic risks from climate change and new financial technologies, and shifted emphasis from banking-focused regulation toward NBFIs and market-based finance.
- The FPC has published in-depth analyses of risks outside the banking sector in its Financial Stability Reports (FSRs) and used stress tests to investigate emerging risks, such as climate change.
- The FSAP identifies critical data gaps that constrain effective systemic risk oversight, notably for flow-of-funds and activities of NBFIs, worsened by COVID-19 delays.
- The FPC has prioritized better data on asset management funds’ leverage, liquidity, and risk, and the BOE has mitigated gaps using ad hoc information requests, surveys, market intelligence, and external data providers with FCA support.
- Recommendation: The FPC should advocate and support efforts to promote international cooperation to ensure the United Kingdom and relevant cross-border authorities have necessary data to monitor and evaluate NBFI risks.
- Recommendation: The FPC should explain its approach to evaluating data availability for systemic risk oversight.

### Open-ended funds, liquidity mismatch, and international coordination
- The BOE and FCA have an important role in international debate over liquidity risk in open-ended funds.
- The FSAP endorses the FPC’s December 2019 FSR principles and July 2021 recommendations on liquidity mismatch.
- The FCA introduced a new authorized fund vehicle for highly illiquid assets and proposed minimum notice periods for investor redemptions for open-ended funds investing in real estate.
- March 2021: FPC judged swing pricing calculation and application could be enhanced to better address first-mover advantage; bank and FCA staff proposed a possible framework to enhance swing pricing.
- Bank and FCA staff set out a possible framework for consistent and realistic liquidity classification of fund assets; effectiveness depends on global application.
- Further measures (e.g., redemption notice periods) should consider liquidity of underlying assets; reform requires international collaboration through the FSB and IOSCO.

### Role of the FCA and capacity building
- As systemic risks from market-based finance grow, the FCA’s role in supporting systemic risk oversight through the FPC should continue to grow.
- The FCA has stepped up collaboration with the BOE since the last FSAP, enhanced monitoring of market disruption risks, and should continue to build capacity to monitor and analyze NBFI activities and emerging technology-driven risks.

### Main recommendations (excerpted priorities and timing)
- SEC 1
  - Reaffirm the primacy of the FPC’s financial stability objective and consider prioritization of recommendations to the FPC under its objectives as part of the remit process. NT — HMT
  - The FCA’s role in supporting systemic risk monitoring, oversight, and risk analysis through the FPC should grow as NBFI risks evolve; the FPC must boost its own coverage of these issues. MT — FCA
  - HMT should be clear about the scope of expertise sought from the FPC’s external members as a group. MT — HMT
- SEC 2
  - The FPC should continue to advocate and support efforts to promote international cooperation and ensure authorities have data and information needed to monitor and assess risks, particularly for NBFIs. NT — FPC, FCA, with other agencies
  - The FPC should explain its approach to evaluating data availability for systemic risk oversight. MT — FPC
- SEC 3
  - The FPC should ensure timely information sharing protocols with the PRA and FCA regarding measures in development that may have systemic financial stability implications. NT — FPC, PRC, FCA
  - Removal of the FPC’s affordability stress test requires careful consideration given rising mean LTI and fast-rising housing prices. NT — FPC
  - The FPC and U.K. authorities should continue international work to strengthen resilience of the open-ended fund sector in line with FPC’s 2019 principles and 2021 recommendations; an effective liquidity classification framework could help determine redemption terms. NT — FPC

*Prepared by Monetary and Capital Markets Department as part of the IMF Financial Sector Assessment Program (FSAP) for the United Kingdom.*

### INTRODUCTION

### INTRODUCTION

### Overview
- This technical note analyzes the United Kingdom’s systemic risk oversight and macroprudential policy framework and how it has evolved in practice since 2016 as part of the IMF’s 2021 Financial Sector Assessment Program (FSAP) for the United Kingdom.
- Analysis sources: review of public materials; meetings with the Bank of England (BOE), Financial Conduct Authority (FCA), and Her Majesty’s Treasury (HMT); requested non-public materials; and review of joint responses to questionnaires.
- The macroprudential framework is largely unchanged since the 2016 FSAP; this note evaluates how authorities have operationalized the framework rather than its design.

### Operationalizing the framework — key findings
- Since 2016, the Financial Policy Committee (FPC) and other U.K. authorities have:
  - Clarified responsibilities.
  - Developed new mechanisms for cooperation.
  - Fine-tuned communication strategies.
- The FPC remains central to financial stability monitoring and policy, working closely with the Prudential Regulation Committee (PRC), the FCA, and other authorities.
- The FCA has increased its profile in systemic risk oversight as financial stability concerns shift toward market-based finance; the FCA’s role in supporting the FPC should continue to grow.
- Recommendations emphasized in the note (summarized below) focus on:
  - HMT’s remit letter to the FPC.
  - Strengthening FCA collaboration with the BOE and FPC as systemic risk in supervised markets increases.

### FPC framework for systemic risk monitoring and assessment — key findings and recommendations
- The U.K. authorities established an exemplary framework for systemic risk monitoring and assessment and have adapted it to emerging challenges.
- The FPC and PRC collaborate closely on the annual bank stress test.
- Since 2015, the FPC has orchestrated an interagency process to identify and address risks beyond the banking sector.
- Recommendations highlight:
  - Closing data gaps and strengthening systemic risk monitoring capabilities, particularly for NBFIs.
  - Learning lessons from recent failures of two internationally active nonbank financial companies.
  - The FPC should advocate for and support U.K. efforts to promote international cooperation to ensure authorities have needed data on NBFIs.
  - The FPC should explain its approach to evaluating data availability for systemic risk oversight.

### FPC approach to mitigating systemic risk — focal areas and recommendations
- Focus areas reviewed:
  - Countercyclical capital buffer.
  - FPC mortgage market recommendations.
  - Evolving approach to liquidity mismatch in open-ended investment funds.
  - Policy response to the pandemic.
- Recommendations:
  - Ensure timely information-sharing protocols with the PRA and FCA regarding measures in development that may have systemic financial stability implications or interact with macroprudential measures.
  - Be prepared to act if developments in the residential mortgage market warrant intervention.
  - Continue to advocate for principles on liquidity mismatch first set out in the December 2019 Financial Stability Report and further considered in the 2021 review of liquidity management in open-ended funds.

### Mandates — institutional roles and interactions
- FPC:
  - Primary objective: contribute to the Bank of England’s financial stability objective by identifying, monitoring, and taking action to reduce systemic risks and protect and enhance resilience of the U.K. financial system.
  - Secondary objective (subject to the first): support the Government’s economic policy as defined by the Chancellor in an annual remit letter to the FPC.
  - Membership: six BOE members (the Governor, four Deputy Governors, and the Executive Director for Financial Stability Strategy and Risk); the Chief Executive Officer of the FCA; five external members appointed by the Chancellor; and a non-voting member from HM Treasury.
- PRC (Prudential Regulation Committee):
  - Mandate aligned with BOE’s financial stability objective; responsible within the BOE for exercising the Bank’s function as the PRA.
  - General objective per Section 2B FSMA: promote the safety and soundness of PRA-authorized firms and consider financial stability effects of microprudential supervision.
  - PRC generally looks to the FPC for guidance on the nature and scale of financial stability risks to consider.
- FCA:
  - Conduct regulator for nearly 51,000 financial services firms and financial markets; prudential supervisor for 49,000 firms (setting specific standards for 18,000 firms), including asset managers, trading venues, and certain market infrastructure providers.
  - Since January 1, 2021, supervises credit rating agencies and trade repositories.
  - Strategic objective: ensure relevant markets function well; operational objectives include protecting and enhancing integrity of the U.K. financial system, promoting effective competition, and securing appropriate protection for consumers.
  - No standalone financial stability mandate, but contributes via CEO voting role on the FPC and monitoring potential financial stability risks posed by hedge funds and other alternative investment funds (AIFMD implementation).
- HMT:
  - Determines macroprudential oversight regime structure and directional powers granted to the FPC (subject to Parliament).
  - Owns the Authorities’ Response Framework (ARF), jointly managed with the Bank and FCA.
  - Uses the Chancellor’s annual remit and recommendations letter to recommend actions to the FPC on primary and secondary objectives; since 2016 has asked the FPC to consider promoting “productive finance” and supporting government policy toward the financial services industry (including competitiveness and innovation).
  - In 2020 added climate change as relevant to both primary and secondary objectives; in 2021 added access of first-time buyers to the housing market and environmental sustainability as part of existing recommendations.
  - 2020 remit letter clarified the FPC should “routinely assess whether it can take actions” to support the secondary objective where not conflicting with the primary objective.

### Organization — staffing and structures
- Bank of England support for financial stability oversight:
  - Deputy Governor for Financial Stability manages four groups with more than 350 full-time staff.
  - Financial Stability Strategy and Risk (FSSR) directorate: 155 staff in 2021; houses the FPC secretariat.
  - Financial market infrastructure directorate: 124 staff.
  - Central bank digital currencies (CBDC) unit: 21 staff; launched in 2021.
  - International policy unit: 64 staff; co-managed with the Deputy Governor for Monetary Policy.
  - Staff sizes: FSSR and international unit constant over past three years; FMI has grown steadily; CBDC launched in 2021.
- Prudential Policy Directorate (PPD) within the PRA:
  - Staff of roughly 180.
  - Units focused on: prudential policy framework; banking capital policy; governance, accounting, reporting, and data; insurance policy; and strategy, policy, and approach.
  - PPD supports both the PRC and the FPC in designing and implementing prudential regulation to remove or reduce systemic risks.

*Source: INTRODUCTION (1gbrea2022005).*

### 16.      HMT also has a well-staffed Financial Stability Group that leads its financial stability

### 16.      HMT also has a well-staffed Financial Stability Group that leads its financial stability

### Structure and staffing
- HMT’s Financial Stability Group leads financial stability work and regularly briefs management on key risks.
- The group has approximately 80 staff in four teams.
- The largest team is Financial Stability Strategy and Analysis (FSSA), which:
  - conducts its own independent analysis and provides advice on medium-term financial stability risks, including risks relating to Brexit and future financial regulations;
  - supports senior HMT officials (including HMT’s non-voting member on the FPC);
  - oversees the appointment of external members to the FPC; and
  - manages HMT’s international engagement with the Financial Stability Board.
- Other teams in the Financial Stability Group cover:
  - Banking Assets and Resolution Strategy;
  - Resilience and Resolution; and
  - a team providing the secretariat of the independent Ring-Fencing and Proprietary Trading Review.
- The Financial Stability Group works closely with:
  - the separate Financial Services Group, which develops a broad range of policies for the financial sector; and
  - HMT’s fiscal area, which is responsible for managing the HMT balance sheet.
- The FCA’s Wholesale and Financial Stability Team (reported to the Chief Economist) supported the FCA CEO as a voting FPC member and at the time of the FSAP mission had 12 members, including six economists focused on financial stability work. The team provides the FPC with briefings and analysis and participates in FSB groups and IOSCO committees.

### Powers
- The FPC has broad-ranging powers of recommendation under the Bank of England Act 1998, as amended in 2012; it can make policy recommendations to any party, including the FCA, PRA, and HMT.
- For the PRA and FCA, the FPC’s recommendations are on a comply-or-explain basis.
- Since 2013 HMT has granted the FPC specific direction powers to give directions to the PRA or FCA to implement macroprudential measures approved in advance through secondary legislation under the Bank of England Act 1998.
- Powers granted by Parliament prior to the last FSAP include the power to set:
  - the countercyclical capital buffer;
  - sectoral capital requirements for U.K. firms;
  - the leverage ratio; and
  - loan-to-value and debt-to-income limits for U.K. mortgages on owner-occupied properties.
- In 2017, Parliament approved granting the FPC the power to set loan-to-value and debt-to-income limits for U.K. mortgages on buy-to-let properties.
- The BOE and PRA have information-gathering powers:
  - the BOE may direct the FCA to provide information accessed through supervision or to acquire new information to help assess financial stability risks;
  - the PRA has a duty to collect information relevant to safety and soundness and a “financial stability information power” to demand additional information even from firms it does not supervise (e.g., fund managers and third-party service providers).
- The BOE and PRA have not felt it necessary to use these information powers to date.

### Interagency cooperation
- Informal mechanisms complement formal institutional mechanisms to foster coordination and cooperation among agencies.
- FSAP noted effective collaboration and almost seamless data-sharing among Bank departments and across agencies, supporting macroprudential oversight and policy development.
- Formal alignment:
  - mandates of microprudential regulators are aligned with the Bank of England’s financial stability objective;
  - the FPC has a duty to avoid exercising functions that would prejudice microprudential regulators’ objectives.
- Overlapping memberships facilitate information-sharing: four BOE Deputy Governors sit on both the FPC and PRC; the Deputy Governor for Prudential Regulation also sits on the FCA Board; the CEO of the FCA sits on both the FPC and PRC; the BOE Governor chairs the FPC, PRC, and MPC.
- Examples of cooperation:
  - the FPC regularly seeks input of the PRC or FCA before making policy decisions;
  - external PRC members may attend certain briefings arranged for FPC members;
  - secretariats typically share FPC and PRC briefing materials, while avoiding release of firm-specific information outside the PRA;
  - quarterly FPC rounds are joint efforts involving FSSR, Markets, International, PPD, and other BOE areas, as well as the FCA;
  - FSSR collaborates with PRA and FCA staff in working groups on operational resilience, the capital stack, Covid policy, open-ended investment funds, fast markets, and derivatives;
  - joint FPC-PRC meetings continue at least once a year for the annual banking stress test;
  - secondments have occurred in both directions between the FCA and BOE for extended periods, with temporary security clearance as needed.
- The Prudential Policy Directorate (PPD) reports jointly to the Deputy Governor for Prudential Regulation and the Deputy Governor for Financial Stability, promoting collaboration; FSSR and PPD staff produce joint notes for topics concerning both committees, with FSSR typically responsible for risk assessment/analysis and PPD for policy design.
- The BOE created a Policy Coordination Committee (PCC) in May 2020 as a subcommittee of the Bank’s Executive Committee to coordinate policy issues spanning different Bank areas; it normally meets weekly and includes all BOE Deputy Governors and Executive Directors as needed.

### Governance and accountability
- Strong accountability arrangements established since the BOE’s expanded responsibilities include internal oversight mechanisms, legislative review, and commitments by the FPC to be transparent about objectives, analysis, and decisions.
- The Chancellor and the Governor meet semi-annually after publication of the Financial Stability Report (FSR) to discuss main findings and financial stability matters.
- The U.K. Parliament’s Treasury Select Committee holds semi-annual hearings in conjunction with FSR publication; typically the Bank’s Governor, Deputy Governor for Financial Stability, and two FPC external members testify. FPC members also testify prior to their appointment.
- The Bank’s triannual Financial Stability Strategy and the annual exchange of letters between Treasury and the FPC provide further accountability mechanisms.
- The Independent Evaluation Office (IEO), established in 2014, has not directly evaluated the FPC’s role but has reviewed programs relevant to financial stability, including reviews spanning 2015–2021 (examples: PRA’s approach to its secondary competition objective 2015–16; the Bank’s forecasting performance 2015–16; financial market infrastructures supervision February 2017; sterling liquidity framework January 2018; resolution arrangements June 2018; bank stress testing April 2019; Bank’s research function December 2019; quantitative easing January 2021).
- Court reviews have focused on committee processes: Parliament abolished the Oversight Committee in 2016 and Court assumed those oversight responsibilities through observer attendance, an annual review process, and surveys of FPC members; changes implemented in response to Court surveys include revisions to routine reporting, FPC agenda management, external publications, and internal IT as described in the 2019 report.
- The semi-annual FSR is the FPC’s main public output and by law must include the FPC’s views of financial stability, recent developments, potential risks, outlook, new recommendations and directions, and progress on previous ones. Since 2015 each FSR has provided separate analyses of main risks and resilience to shocks, and the BOE publishes data used in each FSR on its website.
- Prior to December 2020, the FSR included a checklist monitoring actions to prevent U.K. exit from disrupting financial services if no arrangements were in place for cross-border trade in financial services; the FSR also covered resilience to a “worst case” Brexit economic scenario (e.g., November 2018 FSR).

### FPC process
- The FPC assesses financial stability at least quarterly in meeting rounds spanning at least four weeks. Each cycle:
  - begins with an FSSR-prepared round plan signed off by the Governor and sent to Committee members and relevant staff;
  - involves internal planning and briefings across the Bank and through the Policy Coordination Committee (PCC);
  - includes bilateral meetings between the Deputy Governor for Financial Stability and subject matter experts, and separate pre-round briefings for external FPC members and their advisors.
- Typical round meetings:
  - “Briefing” meeting: latest data and analysis on key financial stability risks and system resilience;
  - “Roundtable” meeting: discuss implications for CCyB decision;
  - several “Issues” meetings: staff deep dives on topics with experts from BOE, FCA, or HMT as appropriate;
  - joint meetings with the MPC or PRC where needed.
- The Policy Meeting, where the FPC makes decisions, is guided by an annotated agenda drafted by FSSR staff containing high-level overviews, proposed key judgments, questions for discussion, and draft text for the record. Open issues are highlighted with square brackets.
- Communications:
  - the FPC communicates decisions and judgments in its Financial Policy Summary and Records of meetings quarterly;
  - the Drafting Meeting finalizes the text of main communications at the end of each round;
  - the FPC has adopted a “layered” communication approach:
    - Layer 1: reassure the public (e.g., social media) that risks have been identified and action taken;
    - Layer 2: visual explanations and non-technical language aimed at politicians, journalists, and interested members of the public;
    - Layer 3: the full FSR targeting a more technical audience of market participants, policymakers, and academics.

### Recommendations
- HMT should reaffirm the primacy of the FPC’s financial stability objective and consider how to prioritize recommendations made to the FPC under its objectives as part of the remit process.
- Rationale and risk:
  - The FPC’s secondary objectives include supporting government economic policy to facilitate supply of finance for productive investment and supporting the government’s overall strategy for financial services (which has covered competition and innovation, openness and competitiveness, environmental sustainability and climate change, and housing—supporting first time buyers).
  - The FSAP team found the FPC has provided outstanding and independent leadership on diverse financial stability issues during the review period.
  - An increase in the number of issues HMT recommends the FPC consider under its secondary objective could risk diluting the committee’s focus on financial stability and burden members with tasks outside their expertise.
- Action suggested:
  - HMT should consider whether some recommendations could be better prioritized and whether alternative institutional structures may be better placed to respond to some challenges, allowing the FPC to maintain its focus on financial stability.

*Source: 1gbrea2022005 - 16.      HMT also has a well-staffed Financial Stability Group that leads its financial stability (excerpt).*

### 33.      Language introduced in the 2020 remit and recommendations letter—suggesting the

### 33.      Language introduced in the 2020 remit and recommendations letter—suggesting the

### FPC objectives and focus
- Language introduced in the 2020 remit and recommendations letter suggested the FPC may “routinely assess whether it can take actions” to support its secondary objective, where doing so does not conflict with its primary objective.
- The FSAP team believes:
  - The FPC’s overwhelming focus should be on its primary objective.
  - It should remain beyond the scope of the FPC to spend a significant amount of its time devising actions to support the economic policy of the government.
  - The FPC’s primary objective is sufficiently important and complex to require most of the committee’s time and expertise.

### FCA role in systemic risk monitoring
- The FCA’s role in supporting systemic risk monitoring, oversight, and risk analysis through the FPC should grow as the potential systemic risks posed by NBFIs, market-based finance, private markets, and core financial markets continue to evolve.
- The FPC must boost its own coverage of these issues in its deliberations.
- The FCA should continue to devote focus and resources to supporting the FPC’s identification and analysis of potential systemic risks, working closely with the PRA and HMT.

### HMT guidance on external FPC membership
- HMT should continue to be clear about the scope of expertise it seeks from the FPC’s external members as a group.
- Since 2011, the membership has always included:
  - a former senior central banker from overseas, and
  - one or more financial experts from investment banks.
- Other members have come from regulatory agencies and academia.
- The committee has had few members with significant commercial banking backgrounds and none with an insurance background.
- HMT officials indicated the selection process focuses on both technical expertise and the perspectives a candidate might bring to financial stability discussions.
- Further public guidance about the targeted mix of skills and perspectives could be useful.

### Systemic risk monitoring and assessment — overall findings
- The U.K. authorities put in place an exemplary framework for systemic risk monitoring and assessment and have made sensible changes to that framework in response to emerging challenges.
- A systemic risk framework should:
  - start with key sources of fragility and an understanding of potential transmission channels;
  - cover all potential sources of stress—from banks, nonbank financial institutions, markets, and relevant nonfinancial entities;
  - have mechanisms for regular review of those sources as markets evolve;
  - use multiple sources to inform ongoing risk identification and employ robust quantitative and qualitative techniques (for example, risk dashboards and stress tests);
  - have a process for identifying and addressing gaps and other weaknesses in data.
- The FPC leads an interagency process that meets these requirements well and has responded nimbly to changing circumstances (shifted mid-2010s to address NBFI risks; dedicated resources to monitor Brexit, climate change, and new technologies; switched to crisis mode at the dawn of the pandemic).

### A. Systemic Risk Monitoring — structure and tools
- The FPC receives broad support for systemic risk monitoring from FSSR, PRA, other parts of the BOE, and FCA.
- FSSR directs financial stability risk monitoring and analysis and maintains a frequent flow of information with PRA and FCA as risks accumulate.
- Expert groups analyze continual and emerging threats; FSSR supports the FPC’s quarterly meeting cycle.

Key published indicators and coverage
- The FPC publishes quarterly the core indicators that inform its countercyclical macroprudential policies.
- In November 2021 the FPC updated indicators used to monitor bank resilience for setting:
  - the countercyclical capital buffer (CCyB),
  - leverage requirements, and
  - sectoral capital requirements.
- For the CCyB, the 17 indicators cover:
  - bank balance-sheet stretch,
  - nonbank balance sheet stretch, and
  - conditions and terms in markets.
- The FPC also publishes core indicators for housing market policies, including:
  - loan-to-income,
  - loan-to-value,
  - debt-to-income ratios,
  - household credit growth,
  - housing transactions, and
  - housing prices.
- Additional indicators and dashboards monitor financial conditions (e.g., a risk table at each policy meeting with data on credit costs, flows, and conditions across residential housing, commercial real estate, and corporate sectors).
- The FPC regularly reviews costs of long-term debt for U.K. banks to track refinancing and funding capacity.

Monitoring enhancements and data gaps
- The FPC updated monitoring tools and focused increasingly on leverage and liquidity risks in NBFIs and market-based finance following the “dash-for-cash” episode in March 2020.
- The FPC developed new indicators in response to the pandemic lockdown to monitor rapidly evolving impacts.
- Available data could be improved for more optimal assessment of leverage and liquidity risks outside the banking sector.

Modeling and analytics
- BOE staff developed a GDP-at-risk model for the FPC and are experimenting with machine-learning techniques to predict financial stress.
- GDP-at-risk:
  - is a summary statistic allowing analysts to compare potential tail risks to the economy in common units;
  - is typically presented as the worst annual average GDP growth that could occur in 5 percent of outcomes.
- BOE staff used GDP-at-risk to evaluate FPC policies; for example, BOE staff estimated that GDP would have been up to 1.5 percent lower in the absence of the FPC’s mortgage recommendations (December 2019 FSR, p. 58).
- BOE staff found most machine-learning models they tested outperformed standard regression models in forecasting financial crises (2020 paper).

Surveys, interviews, and field intelligence
- The BOE conducts regular surveys and interviews:
  - Systemic Risk Survey (biannually since 2009; suspended during pandemic and resumed October 2021).
  - Biannual household survey (conducted by a private consultancy).
  - Decision maker survey of chief financial officers at U.K. businesses.
- The executive director of the FSSR meets quarterly with chief risk officers of major banks for market intelligence.
- The BOE operates a dozen field offices across the U.K. to gather community and business insights presented to the FPC.

FCA-specific contributions
- The FCA’s oversight of firms and markets gives it unique access to data, information, and insights about emerging systemic risks in NBFIs.
- FCA staff engage continuously with market participants through supervision and policymaking; they share market insights and analysis with BOE staff.
- The FCA’s portfolio approach (since 2016) distinguishes:
  - “fixed” firms (supervised individually) and
  - “flexible” firms (supervised thematically).
- As at the end of December 2021, the FCA used 44 portfolios in its portfolio approach.
- Portfolios are designated red, amber, or green based on inherent level of harm; the FCA analyzes each portfolio and determines strategies focusing on greatest risks.
- The FCA overhauled its risk dashboard to focus on portfolio-level risks.

Examples of FCA engagement on systemic risks
- The FCA’s alternatives portfolio supervision strategy (January 2020) identified market integrity and disruption as supervisory priorities and highlighted risks from leverage and illiquid investments in alternatives (hedge funds and private equity funds).
- The alternatives team engaged larger alternative funds where assets under management or derivatives exposure is significant and planned wider peer group assessment as part of the 2022/23 supervision cycle.
- The FCA noted data gaps and infrequency of data for NBFI risk analysis; IOSCO’s minimum standard was mostly annual frequency, which is not optimal for identifying NBFI risk and interconnectedness.

International leadership
- The Bank of England published Assessing the Resilience of Market-Based Finance under the FPC’s guidance, identifying three issues to address for NBFI intermediation resilience:
  - reducing demand from the nonbank financial system for liquidity in stress,
  - ensuring the resilience of the supply of liquidity in stress, and
  - potential additional central bank liquidity backstops for market functioning.
- Major policy initiatives in these areas require international agreement; BOE and FCA must continue analysis and leadership at the FSB, IOSCO, and other fora.

### Box 1 — FCA contributions to systemic risk monitoring (selected points)
- The FCA listed more than 50 presentations of papers to the FPC in the FSAP review period, mostly in collaboration with BOE colleagues.
- Examples raised to the FPC:
  - 2017: Principal Trading Firms identified as key liquidity providers and potential concentration risk in clearing banks; FCA and BOE jointly reviewed EMIR data for FPC’s “fast markets” workstream (July 2019 FSR concluded no material financial stability risks from concentration).
  - 2016: Rapid growth of exchange-traded funds (ETFs) flagged; FCA undertook “deep-dive” analysis of fixed-income ETFs; July 2019 FPC judged most ETFs did not appear to present material financial stability risks.
  - AIFMD implementation requires the FCA to monitor potential financial stability risks from hedge funds and other alternative investment funds.
  - Proximity to Failure (PTF) and Harm in Failure (HIF) frameworks identified around 35–40 percent of firms with weakest financial resilience and potential material harm are in the payments sector.
  - The FCA noted data gaps and infrequency of data; cross-border activity is often difficult to monitor.

### B. Stress Tests — scope and application
- Stress-testing is central to the FPC’s risk-monitoring activities.
- The Bank of England conducted its first banking system solvency stress test in 2014.
- The annual test assesses individual banks and the system; scenarios vary countercyclically and are an input to the CCyB.
- The FPC and PRC collaborate closely; FPC reports sector-wide and firm-specific results in the year-end FSR.
- Scenarios have varied to address specific risks (consumer credit in 2017; leveraged lending in November 2018) and to evaluate resilience to EU exit (November 2017 and June 2018 FSRs).
- Biennial exploratory scenarios were introduced to explore longer-term challenges (fintech and low interest rates in 2017; liquidity stress in 2019; climate-related risks in 2021).
- A cyber risk stress test recommended by the FPC in 2013 was developed and is run by the authorities.

Pandemic-era stress testing
- Early in the pandemic the Bank cancelled its annual bank solvency test and conducted a desktop analysis described in the May 2020 FSR.
- August 2020: a forward-looking reverse stress test calculated economic paths that would deplete banks’ regulatory capital buffers by about 5 percent; conclusion: such depletion would occur only under very severe economic conditions where cumulative loss of economic output associated with Covid would be twice as large as the MPC’s August 2020 projection.
- The FPC judged from this exercise that U.K. banks, in aggregate, had sufficient capital buffers to lend in and remain resilient across a wide range of outcomes.

Methodological insight
- BOE concluded reverse stress tests may be a better approach during periods of stress, as they can avoid procyclical recommendations to conserve capital if the reverse test finds depleting outcomes unlikely.
- The outcome of the 2021 bank solvency stress test was published on December 13, 2021; based on that, the FPC judged that the U.K. banking system remains resilient to a much more severe downturn than the MPC forecasted.

Stress testing beyond banks
- During the pandemic the PRA carried out separate stress tests of the largest life and general insurance firms; aggregated results published in June 2020 showed sector robustness to downside stress.
- Insurance tests focused on business interruption policies (general insurers) and credit downgrades on matching adjustment portfolios (life insurers).

### C. Risks Beyond Banking — Risks Beyond Banking (RBB) exercise
- Since 2014 the FPC’s annual Risks Beyond Banking (RBB) exercise has:
  - brought together analysis across the BOE, including the PRA, and the FCA to identify and monitor potential systemic risks outside the core banking system;
  - aimed to identify actions the FPC or other authorities may need to take to acquire new data for monitoring or recommend regulatory responses (including changing the regulatory perimeter or regulation of existing activities).
- The RBB exercise:
  - takes six months and culminates in a comprehensive report to the FPC;
  - provides opportunities for agencies to share information and discuss data and analysis gaps;
  - results in FPC summarized recommendations in the Financial Stability Report.
- The RBB considers three transmission channels of systemic risk:
  1. the provision of critical services;
  2. risk to systemically important counterparties; and
  3. disruption to systemically important financial markets.

*Source: 1gbrea2022005 - 33.      Language introduced in the 2020 remit and recommendations letter—suggesting the (PDF chapter/section).*

### 51.      In the typical RBB exercise, the BOE assesses roughly 40 nonbank activities for fragility

### In the typical RBB exercise, the BOE assesses roughly 40 nonbank activities for fragility and transmission risk and presents a consensus view to the FPC

### RBB exercise: scope, process, and assessments
- BOE experts in the Capital Markets Division prepare a Risk Monitor for the FPC consisting of one-page summaries on each chosen activity, produced in collaboration with PRA and FCA experts.
- Each activity is assessed based on its fragility and key transmission channels, summarized in a matrix in the Risk Monitor.
- Potential fragilities assessed include:
  - maturity and liquidity transformation;
  - leverage;
  - vulnerability to operational risk;
  - contagion risks due to behaviors such as herding or risk concentration.
- Potential transmission channels assessed include:
  - risks to the provision of critical services;
  - systemically important counterparties;
  - market functioning.

### Inputs, horizon scanning, and regulatory perimeter work
- Inputs into the RBB exercise include “horizon scanning” and “regulatory perimeter” exercises by microprudential supervisors.
- The PRA’s horizon-scanning exercise:
  - draws on the work of supervisors and market experts;
  - presents two or three topics to the PRA’s Supervision, Risk, and Policy Committee three times a year;
  - typically covers microprudential topics that cut across companies and industries; topics raising potential systemic risks are elevated to the FPC.
- The FCA monitors its own risks drawing on diverse experts and has launched an annual “Perimeter Report” to identify activities that may need to be brought within its regulatory perimeter; it has published three such reports since 2019.
- The FCA elevates issues that are potentially systemic to the FPC, typically coordinating with BOE experts on analysis and presentation.

### FPC use of RBB: deep dives, close monitoring, and outcomes
- The FPC uses RBB outputs to identify nonbank activities for “deep dives” and “close monitoring” by BOE, PRA, and FCA.
- Characteristics of FPC deep dives:
  - typically take six to nine months;
  - result in FPC recommendations for further monitoring or policy initiatives.
- FPC deep dives published in its Financial Stability Reports (FSRs) include: investment funds (November 2015); market liquidity (July 2016); insurance companies (November 2016); derivatives (November 2017); nonbank leverage (November 2018); leveraged loans (July 2019).
- As of 2019, areas identified for close monitoring were ETFs, high-frequency trading, cloud services, and Fintech.
- The FPC provided an update of progress in meeting deep dive recommendations in its July 2021 report, Assessing the Resilience of Market-Based Finance.

### Lessons from the pandemic (“dash-for-cash”) and recent experience
- Several RBB analyses anticipated key vulnerabilities that manifested in early 2020:
  - liquidity mismatch in open-ended funds;
  - risk of margin calls for pension funds and insurers.
- Unexpected elements during the dash-for-cash included the extent managers of open-ended investment funds relied on money market funds for liquidity management.
- The BOE suspended the RBB exercise during the pandemic and is revamping it for 2022, with planned improvements to:
  - draw on a wider range of industry sources;
  - strengthen links to other horizon-scanning exercises across the BOE;
  - increase focus on new financial technologies;
  - bring in new data sources while improving the use of existing data sources;
  - focus on thematic analyses of key vulnerabilities.

### Regulatory perimeter: payments firms and systemic importance
- The FPC has suggested it may recommend changes to the Bank of England’s regulatory perimeter to include systemic firms in relation to payment services.
- In its December 2019 FSR, the FPC proposed a regulatory model for systemically important payments firms grounded in three principles:
  1. regulation of payments should reflect the financial stability risk, rather than the legal form, of the activity;
  2. the systemic importance of a single firm should be evaluated by its role in a systemic payment chain;
  3. supervisors should collect sufficient information to identify systemically important payments firms as they emerge.
- The FPC has not made a formal recommendation on the subject to HMT.

### Cross-border NBFI activities and governance lessons
- The high-profile failures of two internationally active financial groups revealed challenges in identifying vulnerabilities in dynamic cross-border NBFI activities.
- Global supervisors later described the incidents as non-systemic, but the events highlighted risks that could have become systemic under different circumstances.
- Key issues identified:
  - several international banks and corporate and investment banking branches lacked appropriate governance and risk management arrangements and could not monitor and mitigate risks from these activities;
  - supervisors were unable to systematically monitor these positions in real-time due to data constraints and were not aware of common exposures across banks globally;
  - elements in domestic regulatory regimes (for example, the United Kingdom’s approach to “appointed representatives”) potentially kept risks off supervisors’ radar;
  - certain entities were not subject to comprehensive regulatory disclosure requirements due either to their legal status or the instruments in which they transacted.

### Data and information: importance, gaps, and initiatives
- Timely, regular, relevant, and usable data are essential for financial stability analysis; the FPC and BOE staff must lead in identifying and evaluating data needs, working with the FCA for firms and markets it regulates.
- Progress in filling three material data gaps identified in the 2016 FSAP has been mixed: the flow of funds, the activities of nonbank financial institutions, and the buy-to-let mortgage market remain areas of unfinished work.
- The FPC’s July 2021 assessment of market-based finance prioritized collecting better data on:
  - asset management firms’ use of leverage, potential losses, and potential liquidity demands;
  - margin practices in noncleared derivatives markets.
- The FPC has not yet used its special powers to call for new data collections, partly because the international nature of market-based finance limits the value of domestic-only collections.
- The BOE and FCA have been proactive internationally (FSB, IOSCO) in pushing for better data, notably on leverage in hedge funds and other alternative investment funds.
- The pandemic spurred ad hoc international information-sharing initiatives; more international coordination is needed to monitor cross-border nonbank financial firms and to aggregate and share trade repository data to analyze cross-border derivatives exposures.

### Authorities’ use of external data, novel sources, and tools
- The BOE uses commercial datasets to build monitoring capabilities for foreign-domiciled asset managers and to complement FCA data collections for U.K. asset managers (money market funds, property funds, exchange-traded funds, open-ended mutual funds).
- Following the family fund failure, FMID and FSSR staff developed a proof-of-concept monitoring tool to identify large and fast-growing counterparties in equity derivatives using EMIR trade repository data.
- BOE researchers and FCA analysts have used new data sources such as internet search data (since 2011), credit derivatives data, trade repository derivatives data, and MiFID2 transaction reporting data.
- During the pandemic, the BOE produced a weekly pack of high-frequency indicators including novel data sources.
- The BOE and other domestic authorities have established “gateways” to share confidential information under certain conditions; the FCA has a legal gateway to share confidential data with the BOE where it will help the BOE perform its statutory functions, including financial stability oversight.
- Section 348(1) of FSMA prevents the FCA from disclosing confidential information without consent, except where legal gateways are engaged.

### Box 2 — Data needs for financial stability analysis: sector-specific findings and recommendations
- Banks
  - Data collections improved with COREP, FINREP, and PRA 110.
  - PRA runs validation and plausibility checks, but newer or out-of-perimeter data collections (e.g., Stress Test Data Framework (STDF) datasets) sometimes present significant limitations that constrain broader use.
  - Recommendation: revise validation and plausibility rules (e.g., admissible values for identifiers) and enforce them more strictly to enhance data quality and usability.
- Sterling Markets
  - Key need for granular data on holdings of Sterling instruments by investor class, including nonbanks and entities abroad, to better assess stressed market conditions.
  - BOE access to trading data on sterling Gilts and corporate bonds collected by the FCA could be used more frequently to analyze trading concentration by investor type.
- Flow of Funds Statistics
  - ONS published over 30 experimental articles since 2016, reduced unknown sectors, and published additional data for investment and “other financial institutions” sectors.
  - Quarterly balance sheet data from the Financial Services Survey for nonbanks is now published.
  - Remaining gap: granular data on domestic and foreign NBFIs to analyze links among U.K.-based banks and NBFIs with similar entities abroad.
- Direct Lending by NBFIs
  - Authorities collect aggregate lending statistics for insurers, pension funds, finance companies, and other financial institutions annually for the FSB’s nonbank monitoring exercise, but collections exclude corporate loans and unregulated consumer credit providers (e.g., buy-now-pay-later and employer salary advance schemes).
  - Data on asset quality of nonbank small business loans and commercial real estate loans are not consistently available.
- Insurers
  - Solvency II improved supervisory reporting, including quarterly asset-by-asset reporting.
  - Gaps remain in liquidity risk and cross-border business data; short-term cash-flow data and consistent reporting of cash and cash equivalents are limited.
  - Derivatives data from trade repositories under EMIR needs further enhancement and quality checks to monitor margin call risks.
  - For some insurance intermediaries, liquidity reserves were collected weekly during the pandemic for the first 12 months and monthly thereafter.
- Money Market Funds (MMFs)
  - Most sterling-denominated MMFs are domiciled in Ireland or Luxemburg; security-level commercial data are available daily and include inflows and outflows.
  - BOE typically relies on commercial data to track foreign-domiciled MMF flows monthly.
  - Only 18 MMFs with about £21 billion (as of 30 December 2021) in assets are domiciled in the United Kingdom and subject to FCA oversight, roughly 8 percent of all sterling MMF assets under management.
  - These UK MMFs report quarterly to the FCA under onshore MMFR; the FCA can request more regular data as needed.
- Open-Ended Funds
  - Supervisory data for U.K.-domiciled open-ended funds provide line-by-line holdings but are only available annually or semi-annually with reporting delays up to four months for most OEFs.
  - Many funds holding sterling assets are domiciled overseas; for U.K. MMFs, line-by-line security-level holdings are reported quarterly under U.K. MMFR.
  - During the pandemic, BOE and FCA collected pandemic-related flows and other information from a large sample of U.K.-authorized corporate bond funds; the FCA collected daily flow data from property funds and some other funds.
  - Recommendation: supervisors should receive data at a much higher frequency to assess potential risks posed by open-ended funds.
- Alternative Investment Funds (AIFs)
  - Managers provide semi-annual information to the FCA (for U.K.-domiciled managers) on financial leverage, types of borrowers and lenders, and portfolio sensitivities; difficult to use for assessing liquidity needs in stress events.
  - BOE’s Hedge Funds as Counterparty Survey provides valuable semi-annual insights; the BOE is considering improvements.
  - The family fund failure highlighted shortcomings in identifying concentrated exposures; tools to aggregate and share trade repository data need international development.
- Central Counterparties (CCPs)
  - Supervisory data are extensive (initial and variation margins at the account level, sensitivities to interest rates and other factors); supervisors review CCP models regularly.
  - Recommendation: enhance transparency and predictability of potential liquidity needs by publishing potential liquidity demands CCPs may place on clearing members and potential pass-through impacts on members’ clients.
- Internationally active cross-border financial groups
  - Following two high-profile failures, the United Kingdom should consider expanding oversight over internationally active NBFIs operating in the United Kingdom to include additional monitoring criteria.
  - Recommendations include: closer scrutiny of unregulated entities of mixed cross-border groups to evaluate impacts on regulated entities and systemic implications; review whether supervisory cooperation arrangements provide sufficient information-sharing for effective monitoring of systemic risks.

*Source: IMF staff summary of material in 1gbrea2022005 - In the typical RBB exercise, the BOE assesses roughly 40 nonbank activities for fragility and transmission risk and presents a consensus view to the FPC.*

### 64.      The FPC regularly receives data from BOE and PRA staff and has received data from

### 1gbrea2022005 - 64.      The FPC regularly receives data from BOE and PRA staff and has received data from

### Data sharing, information sources, and MoUs
- The FPC regularly receives data from BOE and PRA staff and has received data from the FCA on an ad-hoc basis.
- The FCA routinely shares hedge funds’ AIMFD data with the Capital Market Division of FSSR to enable leverage analysis.
- The FCA shared data from an ad-hoc survey of open-ended investment funds for a joint BOE-FCA project.
- The Capital Market Division uses MiFID2 data from the FCA and trade repository data from the BOE’s Financial Market Infrastructure Directorate.
- The FPC has not found it necessary to use its formal powers to request data from other authorities.
- The BOE and FCA have information-sharing MoUs with overseas counterparts to support microprudential supervision and systemic surveillance.
  - After the Brexit referendum, the FCA signed over 80 MoUs with EEA and non-EEA supervisory authorities.
  - The BOE has an MoU with the Office of Financial Research (U.S. Treasury); though not formally invoked, it has facilitated more open exchange of views and data.
  - The FCA has multilateral MoUs with securities and insurance regulators and other international bodies, including IOSCO.

### BOE data strategy and capabilities
- In 2019 the BOE elevated the role of the Chief Data Officer to form and implement a “One Bank” data strategy.
  - The Chief Data Officer is now an Executive Director and heads the Data & Analytics Transformation Directorate, reporting to the Deputy Governor for Monetary Policy (and with dual reporting to the Deputy Governor for Prudential Regulation).
- The BOE’s Data & Analytics strategy is organized around three “pillars”:
  - People: staff training for core analytical tools and Bank-wide communities of interest.
  - Data: oversight of the BOE’s data quality framework and data inventory.
    - The inventory, introduced in 2016 and recently relaunched, includes more than 1,000 statistical, regulatory, and operational datasets collected by the BOE and other authorities, as well as data purchased from commercial vendors.
  - Analytics: a Bank-wide data and analytics platform and an internal code repository have been launched.

### BOE–FCA data collection initiative and standards
- The BOE and FCA launched a multi-year initiative to improve data collection with three initial goals:
  - defining and adopting common data standards;
  - modernizing reporting instructions;
  - integrating financial reporting to be more consistent across sectors and regulators.
- Phase one use cases are focused on quarterly derivatives statistics, commercial real estate data, liquidity monitoring metrics, and financial resilience reporting.
- The BOE and FCA have been active adopters of XBRL for aspects of regulatory reporting and strongly support the legal entity identifier (LEI) and other international data harmonization efforts.

### FSAP recommendations on data (summary of specific gaps and priorities)
- The FPC should continue to advocate and support international cooperation to ensure authorities have the data and information needed to monitor and assess risks, particularly for NBFIs.
- Specific data gaps and recommended improvements identified by the FSAP team include:
  - improving the quality of stress-test data that banks provide;
  - improving the BOE’s access to trading data on sterling Gilts and corporate bonds;
  - collecting consistent data on nonbank lending;
  - improving basic stock data and derivatives data from insurers;
  - collecting regular data on MMFs, both domestically and overseas;
  - collecting—in a proportionate way and in line with global initiatives—reliable, more regular liquidity, leverage, and position data from open-ended funds;
  - more frequent and more useful liquidity, leverage, and risk data from hedge funds;
  - collecting more information on the potential liquidity demands that CCPs may place on their clearing members or the members’ own clients.
- Projects underway that should be completed in the near- to medium-term include:
  - improving the content and increasing the frequency of the hedge funds as counterparty survey;
  - progressing the flow-of-funds project (avoid further milestone slippage).

### FCA capacity and role regarding NBFIs
- The FCA should continue to build capacity to monitor and analyze NBFI activities as potential systemic risks grow.
- The FCA has stepped up collaboration with the BOE and support for the FPC since the last FSAP.
- The FCA monitors alternative asset management firms with the greatest potential to disrupt markets and investigates outliers with additional analysis and onsite visits.

### FPC transparency and articulation of data strategy
- The FPC should explain its approach to data and systemic risk oversight, including:
  - how it evaluates data sources and determines which data needs are most pressing for financial stability analysis;
  - how it informs BOE’s and FCA’s data priorities for financial stability analysis and regularly monitors progress in Financial Stability Reports;
  - its commitment to leadership in the international policy arena in addressing gaps and promoting data standards like the LEI.

### Macroprudential powers and use of instruments
- The FPC has broad macroprudential policy powers and is one of a small number of macroprudential authorities with specific, “hard” direction powers to use time-varying macroprudential measures.
- Since 2011 the FPC has made 47 recommendations or directions under its statutory powers, mostly to the PRA and mostly prior to 2016; five of its recommendations were on a comply-or-explain basis.
- Since the last FSAP, the FPC has issued four recommendations, all to the PRA regarding capital or leverage standards; one on a comply-or-explain basis.
- Directions and recommendations are motivated with comprehensive systemic risk monitoring and assessments and supported by cost-benefit analysis where costs reflect potential decline in GDP growth during non-crisis times and benefits reflect reduction of probability or severity of a crisis.

### Practice of policy assessment and soft powers
- The FPC assesses policy measures regularly via data analysis, in-depth econometric modelling, ex-post cost-benefit analysis, research insights, and surveys.
  - Mortgage market recommendations in place since 2014 have undergone multiple reviews, including monitoring lending trends for leakage and using models to estimate counterfactual mortgage market and household leverage evolution.
- The FPC has increasingly used soft powers to influence policy, issuing “policy conclusions” from deep-dive analyses (2015–2019) and publishing frameworks or principles for regulators to follow (e.g., framework for payment systems regulation; principles promoting greater consistency between fund asset liquidity and redemption terms).

### Household mortgage debt: recent developments and risks
- The FPC first acted to limit household indebtedness in 2014 via recommendations to the PRA and FCA:
  - one recommendation sets a floor on the stressed rate spread for mortgage affordability tests;
  - another caps the share of new mortgages each lender can issue at a high loan-to-income (LTI) multiple.
- Mortgage contract features and refinance behavior:
  - Most mortgages in the United Kingdom have a fixed, usually promotional, interest rate period of 2–5 years and are then reset to a variable rate (the reversion rate).
  - Historically, about three quarters of all borrowers refinance their mortgages within six months from the reset onto another promotional interest rate.
  - About one quarter of household mortgage contracts reset annually.
- FSAP stress tests indicate household financial conditions would deteriorate in a scenario with rising inflation and tightening financial conditions, with increased probability of mortgage default driven by mortgages that would be reset during that period.
- Recent house price developments (through September 2021):
  - House prices rose at an annual rate of 11.8 percent through September 2021.
  - The highest regional rate was 16.8 percent in the northwest region.
  - Price growth in London was 2.8 percent.
  - The house price-to-earnings ratio for buyers was 6.7 times in the third quarter of 2021, surpassing the previous historical high of 6.4 times in 2007 nationwide.

*International Monetary Fund — FSAP chapter content unit 1gbrea2022005*

### 81.      Robust housing market  activity reflects a combination of support measures and

### 1gbrea2022005 - 81.      Robust housing market  activity reflects a combination of support measures and

### Housing market dynamics and drivers
- U.K. average house prices increased by 11.8 percent over the year to September 2021.
- High levels of housing market activity and house price growth may reflect pandemic-related policy supports such as the Stamp Duty Land Tax (SDLT) holiday, mortgage payment deferrals, and the mortgage guarantee scheme (MGS).
- The SDLT holiday was introduced in June 2020, extended fully until June 2021, and then phased out by the end of September 2021.
- Over 80 percent of households that had taken out mortgage payment deferrals had returned to full repayments by May 2021.
- Prices continued to rise in the fall of 2021 even as these supports mostly expired, a pattern observed across jurisdictions.
- Other drivers cited:
  - Larger household savings accumulated during the pandemic.
  - Increased demand for additional space given flexible working arrangements (consistent with relatively weak demand in central London and other city centers).
  - Lower construction activity.
  - Continued accommodative monetary policy.

### Mortgage borrowing, leverage, and debt-service burdens
- The mean loan-to-income (LTI) ratio has increased in recent months to a historical high.
- Increase in lending is mostly driven by lending at LTI ratios below 4.5 times, but above 4 times.
- Lending above the 4.5 threshold has not increased.
- Lending at LTI ratios above 5.0 times has declined.
- The share of households with high debt-service burdens is largely unchanged and considerably lower than in the run-up to the GFC.
- The ratio of mortgage payments to take-home pay is still considerably lower than in the run-up to the GFC, due to the low interest-rate environment.
- Despite continued low rates, household credit growth has not risen consistently.

### FPC mortgage market recommendations (Box 3) — objectives and mechanics
- Objective: limit the number of highly indebted households and reduce amplification of household consumption declines, mortgage default probability, and feedback loops between mortgage lending and house prices.
- Two mortgage market recommendations introduced in June 2014:
  - A floor on the stressed rate buffer that mortgage originators should apply in the mortgage affordability test.
  - A cap on the share of new mortgages that each lender can issue at high LTI multiples.
- LTI flow limit:
  - The FPC recommended the PRA and the FCA ensure that mortgage lenders would not extend more than 15 percent of their total number of new residential mortgages at LTI ratios at or above 4.5 times.
  - The PRA implemented this within the PRA Rulebook by limiting a lender’s high loan-to-gross-income mortgage contracts to a maximum of 15 percent of all regulated mortgage contracts in any quarter, amended in 2016 to a four-quarter rolling limit.
  - The recommendation is still in effect; the FCA introduced general guidance to the same effect.
- Affordability (stressed-rate) test:
  - In 2014 the FPC recommended lenders use a stressed rate that is 300 basis points higher than the prevailing rate when taking account of future interest rate rises as required under the FCA’s responsible lending rules.
  - The FCA’s MCOB framework requires lenders to consider variable interest rates that would take effect during the first 5 years of the mortgage contract and to assume interest rates will rise by a minimum of 100 basis points over that period.
  - The FPC in June 2014 recommended a higher minimum stressed rate of 300 bps above the prevailing rate; in December 2017 the FPC clarified that the 300-basis-point stress should be applied to the mortgage reversion rate, instead of the mortgage origination rate.
  - With average reversion rates of about 4 percent, this meant households were being assessed against a 7 percent stressed interest rate, on average.
- Market evolution since recommendations:
  - Mortgage terms have increased by an average of well over two years.
  - The number of mortgages with a fixed-rate period of five years or more has increased.
  - Mortgages have “bunched” at LTI ratios just below 4.5 times, while lending above 5.0 times declined.
  - Second-charge mortgages (SCM) are a potential leakage channel but BOE analysis indicated lenders were not systemically exploiting these products to circumvent the flow limit.

### FSAP findings, FPC reviews, and proposed simplification
- The FPC judged in December 2019 that the mortgage market measures should remain in place through cycles in the housing market and concluded benefits substantially outweigh any macroeconomic costs.
- The FSAP considered the FPC 2019 view and noted:
  - If the measures are not available for countercyclical macroprudential action, alternative measures need consideration.
  - Tying the mortgage affordability test to monetary policy could result in sudden market impacts when policy normalizes; a 300-basis-point spread on a reversion rate that changes with monetary policy may be less appropriate when monetary policy rates rise.
- December 2021 FPC judgment and actions:
  - The FPC judged it could deliver macroprudential objectives in a simpler, more predictable, and more proportionate way by maintaining only the LTI recommendation.
  - Analysis suggests the LTI flow limit guards more effectively against unsustainable household indebtedness than the affordability test.
  - Removing the affordability test while maintaining the FCA’s responsible lending rules under MCOB would only marginally affect numbers of households holding “high LTI” mortgages and aggregate household indebtedness in a scenario of rapid house price growth.
  - The FPC decided to consult, in the first half of 2022, on withdrawing its affordability test.
  - The FPC’s analysis assumes the FCA maintains the requirement to consider the effect of future interest rate rises under its MCOB framework.
- The FSAP view:
  - Mortgage market measures have broadly been effective in leaning against buildup of systemic risk.
  - The number of more highly indebted households has not increased while these measures have been in place.
  - The FSAP views the FPC’s affordability stress test recommendation as less appropriate through the cycle.
  - Any removal of the FPC’s recommendation of a minimum 300bp stress test on mortgage reversion rates will require careful consideration given the mean LTI has been increasing and rising housing prices threaten to amplify those developments.

### Countercyclical Capital Buffer (CCyB): objective, indicators, and decisions
- Primary objective: ensure that the banking system can withstand stress without restricting essential services, such as the supply of credit to the real economy.
- The FPC intends to adjust the CCyB to build resilience in the U.K. banking sector as systemic risks evolve: increase the buffer when systemic risk is building and release the buffer once risks abate or materialize.
- The FPC’s CCyB is informed by a list of 17 core indicators across three groups:
  1. Nonbank balance sheet stretch (includes credit growth and the external position).
  2. Conditions and terms in markets (includes the VIX and lending spreads).
  3. Bank balance sheet stretch (includes capital and liquidity measures and market-based resilience measures).
- In December 2020 the FPC removed average risk weights and short-term wholesale funding indicators from the bank balance sheet stretch indicators.
- The FPC does not assess indicators against specific thresholds but reviews them against historical peaks, troughs, and averages; CCyB decisions are also informed by stress test results.
- The FPC Record from November 2015 states that after recovery but before risks are elevated, the CCyB should be in the region of 1 percent.
  - The judgment was based in part on analysis concluding benefits to maintaining U.K. banks’ Tier 1 capital in the region of 10–14 percent in standard risk environments.
- Timeline of notable CCyB decisions:
  - March 2016: FPC announced an increase in the CCyB from 0 percent to 0.5 percent, intended as a step towards the 1 percent neutral rate; the increase was to take effect after 12 months.
  - July 1, 2016: FPC reduced the CCyB rate from 0.5 percent to 0 percent with immediate effect due to the “crystallization of risks around the referendum.” The increase to 0.5 percent never came into effect.
  - June 2017: FPC increased the CCyB rate to 0.5 percent.
  - November 2017: FPC increased the CCyB rate to 1 percent.
  - The increases took full effect in November 2018.
- The FPC’s stylized “financial cycle” and CCyB stance by stage:
  - Stage 1 (risks very subdued): expect CCyB rate of 0 percent.
  - Stage 2 (standard risk environment): the FPC intends to set a positive CCyB rate and currently expects it would be in the region of 2 percent.
  - Stage 3 (risks become elevated): the FPC would expect to increase the CCyB rate above 2 percent.
  - Stage 4 (risks crystallize): the FPC may cut the CCyB rate, including, where appropriate, to 0 percent.

*International Monetary Fund — content from IMF FSAP chapter on the United Kingdom (text unit provided).*

### 95.      The FPC raised the U.K. CCyB  to 2 percent in December  2019, effective 12 months

### 1gbrea2022005 - 95.      The FPC raised the U.K. CCyB  to 2 percent in December  2019, effective 12 months

### Countercyclical Capital Buffer (CCyB) decisions and rationale
- The FPC raised the U.K. CCyB to 2 percent in December 2019, effective 12 months hence, and announced that the 2 percent CCyB was its new neutral, standard risk level.
- Objectives and expected effects:
  - Improve responsiveness of capital requirements to economic conditions so banks can absorb losses and maintain lending through the cycle.
  - Lower the economic cost of buffer build-up by moving early, before risks were elevated.
  - Expected overall loss-absorbing capacity to stay broadly unchanged, as the PRA reduced Pillar II capital requirements accordingly.
- Trade-offs and distributional effects:
  - Shifting capital requirements from Pillar II to CCyB improves responsiveness and simplicity but may favor banks with complex activities.
  - The CCyB would have needed to be between 3.5 percent and 5 percent to absorb losses of the GFC (Global Financial Crisis) per referenced analysis.
- Pandemic-era adjustments:
  - The FPC lowered the CCyB rate from 1 percent to 0 percent in March 2020 to reduce pressure on banks to restrict provision of financial services during the pandemic.
  - In December 2021, the FPC reestablished the CCyB at 1 percent, effective December 13, 2022, judging risks to U.K. financial stability had returned to around pre-Covid levels.
  - Conditional expectation: If the U.K. economic recovery proceeds broadly in line with the MPC’s central projections, and absent a material change in the financial stability outlook, the FPC is expected to increase the rate further to 2 percent in the second quarter of 2022.
- FSAP position:
  - The FSAP supports gradual reestablishment of the CCyB in measured steps to the 2 percent standard risk environment level.

### Asset management — liquidity mismatch and policy responses
- Nature of the risk:
  - Open-ended investment funds can exhibit a liquidity mismatch between daily redemptions and relatively less liquid portfolio assets, creating first-mover advantages and potential fire-sale dynamics.
  - International community (FSB, IOSCO, BIS, IMF) noted growth in open-ended funds since the GFC and occasional stress episodes highlighting first-mover risks for funds investing in illiquid assets (bonds, loans, real estate).
- Early U.K. work and FCA actions:
  - The FPC first identified liquidity mismatch in open-ended funds as a potential financial stability risk in 2015; BOE and FCA staff surveyed 17 asset management firms for the December 2015 FSR.
  - The FPC concluded first-mover risks were minimal in 2015, noting managers could use swing pricing or dilution levies.
  - Post-Brexit (June 2016) episode: about a half-dozen property funds with £18 billion under management suspended operations within two weeks of the June 23 Brexit vote.
  - FCA actions: discussion paper in February 2017; review in July 2017; in September 2019 created a new fund category for “funds investing in inherently illiquid assets” with additional oversight and a requirement to suspend dealing when independent appraisers said there was “material uncertainty” about the value of 20 percent of underlying real estate properties.
- FPC assessments and size considerations:
  - In November 2016, FPC noted some funds had sold assets at significant discounts to meet redemptions and that further stress could pose financial stability risks.
  - In 2018, FPC judged FCA’s proposed reforms likely sufficient given the relatively small size of the sector; open-ended property funds accounted for only 5 percent of commercial real estate investment.
  - FPC indicated interest in revisiting minimum notice periods if funds grew to a more significant size.
- International coordination and policy development:
  - BOE and FCA sought international consensus through the FSB and IOSCO; FSB recommendations published February 2017; IOSCO recommendations on liquidity risk management published February 2018.
  - In the December 2019 FSR, the FPC published principles to better align fund asset liquidity and redemption terms, focusing on:
    - Liquidity measurement reflecting either discount or time needed to sell underlying assets.
    - Redemption prices reflecting the discount needed to sell underlying assets within the redemption notice period (e.g., through swing pricing).
    - Redemption frequency or notice periods reflecting time needed to sell underlying assets without further discounts.
  - The FPC suggested mixes of swing pricing and extended notice periods could be appropriate and would consider implementation after BOE and FCA completed the requested liquidity-mismatch review.
- Pandemic experience and empirical findings:
  - During the pandemic, most U.K.-domiciled property funds suspended redemptions; many remained suspended into 2021. FCA’s mandatory suspension rules for material uncertainty (20 percent threshold) came into effect in September 2020, but funds acted in the spirit of those rules in March 2020 following the Royal Institution of Chartered Surveyors recommendation on March 17.
  - The suspensions prompted FCA consultation on mandatory minimum notice periods for property funds, seeking views on 90-day or 180-day notice period requirements; feedback published in May 2021.
  - BOE-FCA March 2021 report surveyed 51 firms covering 272 funds with total assets under management of £137 billion (fourth quarter of 2019 to second quarter of 2020). Findings:
    - Most funds experienced net outflows during the pandemic.
    - Most funds used swing pricing; both the number using swing pricing and frequency increased during the episode.
    - Approaches to swing pricing varied widely; most managers used bid-ask spreads and transaction costs to calculate swing factors; few considered the broader market impact of redemptions.
    - The survey suggested most corporate bond funds may be over-estimating the liquidity of their fund holdings.
    - None of the surveyed funds had a notice period in place; the survey provided no information on effectiveness of notice periods.
  - BIS observations (December 2021 paper): further contagion related to open-ended bond funds in March 2020 — investors more likely to redeem in response to poor performance; redemption spillovers across funds with common holdings; bonds owned by open-ended funds performed worse and had worse liquidity than similar bonds not owned by these funds; fund managers hoarded cash, aggravating procyclical effects.
- Policy development and frameworks:
  - BOE and FCA proposed frameworks for consistent liquidity classification and enhanced calculation/use of swing pricing; FPC judged swing pricing calculation and application could be enhanced to better address first-mover risks.
  - Staff proposed that consistent and more realistic liquidity classification is an essential first step; acknowledged need for global application for full effectiveness.
  - FCA established a new fund regime to enable managers to set up funds investing in long-term illiquid assets:
    - BOE, HMT, and FCA convened Working Group on Productive Finance in November 2020; Working Group report published September 2021.
    - FCA issued final rules in October 2021 for Long-Term Asset Funds (LTAFs) to facilitate investment in venture capital, private equity, private debt, real estate, and infrastructure.
    - LTAF rules require redemption policies consistent with liquidity profile, including no more frequently than monthly dealing and minimum 90-day notice on redemptions, and an annual formal assessment by the governance body on liquidity management and market integrity.

### 2020 pandemic response — coordination, surveillance, and crisis management
- Coordination among BOE policy committees and the FCA:
  - At the onset of the pandemic, authorities ramped up financial market and real economy surveillance and collaboration among BOE’s three policy committees (MPC, FPC, PRC) and the FCA.
  - On February 24, 2020, the FPC was briefed on potential COVID-19 impacts on U.K. financial stability; a week later it received a joint verbal update with MPC and PRC.
- Crisis management framework and information flows:
  - The Bank put in place heightened oversight and coordination mechanisms, including an information and coordination forum for senior Bank leadership that met daily at the height of the COVID-19 crisis.
  - The crisis management framework was supported by a secretariat that compiled information packages for meetings, drawing from internal crisis dashboards and indicators; content evolved with the risk environment.
- High-frequency monitoring:
  - A high-frequency pack of indicators of U.K. household and corporate stress (the “Swarm”) was produced internally to monitor COVID-19 impacts, initially weekly with frequency declining as stress eased.
  - Additional bank-level crisis indicators were introduced to monitor each bank’s capital and liquidity resilience, including high-frequency data on deposit flows, drawdowns on credit facilities, and forward-looking information from banks on capital and provisioning.

*Source: 1gbrea2022005*

### 115.      The content of the briefing packs and dashboards evolved with the risk environment

### 115.      The content of the briefing packs and dashboards evolved with the risk environment

### Briefing packs, dashboards, and inter-agency coordination
- The Bank had set up meeting mechanisms and dashboards from earlier financial stability events, enabling rapid full functionality during the pandemic.
- The BOE, PRA, and FCA shared indicators, information, and analysis at the staff level as each agency considered measures in response to the COVID-19 crisis.
- Briefing packs and dashboards included novel datasets to monitor economic activity during the pandemic.

### Capital, liquidity, and provisioning measures taken in March–May 2020
- The FPC and PRC acted in March 2020 to bolster banks’ capital cushions so they could absorb potential losses and continue lending.
- The FPC lowered the countercyclical capital buffer (CCyB) to zero and gave forward guidance that it would remain at that level for at least 24 months.
- The PRC issued guidance that banks should not increase dividends or other distributions in response to the FPC’s lowering of the CCyB; reinforced by letters from Sam Woods to U.K. deposit takers on dividend payments (including those previously announced), share buybacks, and cash bonuses.
- The PRA introduced transitional arrangements to smooth the impact of expected credit loss (ECL) accounting on regulatory capital, in accordance with the measure introduced by the Basel Committee.
- In its Guidance on ECL modeling, the PRA recommended firms consider the temporary nature of the shock and fully take into account the government’s significant economic support measures when estimating expected credit losses.
- The PRA issued guidance that loans granted payment deferrals should not automatically be moved between risk stages.
- The PRA, jointly with HMT, announced the delay of the implementation of the Basel 3.1 standard by one year.
- In May the PRA announced the exclusion of loans under the government’s Bounce Back Loan Scheme (BBLS) from the denominator of the leverage ratio.

### Some policy actions taken during initial months of the COVID crisis (selected entries from Table 6)
- Banks: CCyB — 3.11.2020 — Support credit and absorb losses
- Banks: Liquidity and capital buffer usability — 3.11.2020 — Support credit and absorb losses
- Banks: Suspend dividends and cash bonuses — 3.11.2020 — Support credit and absorb losses
- Banks: Accounting IFRS 9, ECL and model guidance — 3.20.2020 — Support credit and absorb losses
- Banks: Pillar II capital requirements set — 5.7.2020 — Support credit and absorb losses
- Banks: Cancel annual stress test — 3.20.2020 — Alleviate operational burdens
- Banks: Postpone liquidity stress test — 3.20.2020 — Alleviate operational burdens
- Banks: VAR calculations — 3.30.2020 — Avoid procyclical capital req's
- PRA supervised firms: Postpone climate exercise — 5.7.2020 — Alleviate operational burdens
- PRA supervised firms: Lowering operational and data review burdens — 5.7.2020 — Alleviate operational burdens
- FCA supervised lenders: Mortgage payment holiday and consumer loan payment deferrals — Various — Support consumers
- Asset Managers: Flexibility over best execution — 3.31.2020 — Market functioning
- Asset Managers: Flexibility in reporting 10 percent declines to investors — 3.31.2020 — Alleviate operational burdens
- Asset managers: Easy digital operations, including virtual meetings and electronic signatures — 4.6.2020 — Alleviate operational burdens

### Operational burden alleviation and supervisory timetable adjustments
- The FPC and PRC cancelled the 2020 annual stress test and amended the timetable of the liquidity stress test to help lenders focus on meeting the needs of U.K. households and businesses.
- On May 7 the PRA detailed plans to enable it and regulated firms to focus resources on highest priority work; measures included postponement of the climate exercise and insurance stress test, lowering operational and data review burdens for stressed VARs, and Libor transitioning.
- The FCA delayed funds’ annual and semiannual reports, gave asset managers and trading venues more time to return supervisory reports, authorized broader use of electronic signatures, and allowed virtual annual meetings.

### Communication on buffer usability and timing of restoration
- The FPC and PRC repeatedly announced their expectation that banks could draw down all elements of their capital and liquidity buffers to support the economy through the temporary shock.
- The guidance referred to all capital buffers above the regulatory minimum capital level, including both the capital conservation buffer and the CCyB.
- The question-and-answer document told banks they would get a sufficient period to restore the buffers once the current stress was over.
- The FPC announced that, based in part on the 12-month implementation lag, any increase in the CCyB would not take effect until March 2022 at the earliest.

### Assessment of banking resilience (May and December 2020)
- In May 2020, the FPC published its judgment that usable capital buffers built up by banks were more than sufficient to absorb potential losses and support the household and corporate sector through the crisis.
- BOE staff conducted a desktop analysis of U.K. banking sector resilience in May 2020; the analysis supported the FPC’s judgment that major U.K. banks and building societies had sufficient capital to withstand even greater losses.
- In December 2020, the FPC published its judgment that U.K. banks, in aggregate, were resilient to the unfolding stress, based on a forward-looking reverse stress test conducted in August.
  - The reverse stress test calculated how severe economic paths would need to be to deplete banks’ regulatory capital buffers by 5 percentage points.
  - The exercise concluded banks’ capital would decline that amount only under very severe economic conditions, in which the cumulative loss of economic output associated with the Covid outbreak would be twice as large as the Monetary Policy Committee had projected in August 2020.
- The FPC judged that U.K. banks, in aggregate, had sufficient capital buffers to lend in, and remain resilient to, a wide range of possible outcomes for the United Kingdom and global economies.

### FCA actions: consumer protection, operational relief, and firm risk frameworks
- The FCA introduced mortgage and consumer credit payment deferrals for customers facing payment difficulties due to circumstances related to COVID-19, and moratoriums on repossession of homes, goods, and vehicles.
- The FCA sought clarification from the High Court via a test case to resolve contractual uncertainty around many Business Interruption (BI) insurance claims.
- The FCA implemented measures to alleviate operational burdens and delayed some policy interventions: delaying funds’ annual and semiannual reports; allowing more time for supervisory reports; authorizing broader electronic signature use; allowing virtual annual meetings.
- The FCA established “proximity-to-failure” (PTF) and “harm-in-failure” (HIF) frameworks early in the pandemic:
  - The FCA assigned an automated, data driven PTF score to rank financial resilience and a more subjective HIF score to rank likely harm from a firm’s disorderly failure.
  - The framework applies to all the approximately 49,000 firms that the FCA regulates prudentially. Of these, 23,000 firms have received the quarterly COVID-19 financial resilience survey.
  - The FCA set up a quarterly survey to get updated information from some types of firms from whom they don’t collect this level of detailed data in ordinary times.
  - The FCA shared this work with relevant working-level PRA staff and is continuing to improve these frameworks through back-testing and evaluation, focusing on data collection, automation, and risk evaluation.

### Outcomes to date and remaining vigilance
- Support measures have yielded positive results to date: lending continued quite well through the crisis to larger corporations and households, and financial institution losses did not result in market turmoil or failure.
- Policy documents and statements have mostly been clear on the duration of temporary measures and when and how they will be reviewed.
- Given banks used a wide range of provisioning approaches during the COVID-19 crisis, more work is needed to ensure adequacy of the ECL allowance.
  - This includes phasing out guidance on the treatment of loans with payment deferrals by reintroducing case-by-case assessment of loans in accordance with pre-crisis accounting and prudential requirements, which could potentially lead to an increase in non-performing exposures when done.
  - Scrutiny should focus on any unintended macro-financial spillovers from these developments.

### Recommendations
- The FPC should continue to ensure timely information-sharing protocols with the PRA and FCA regarding measures in development that may have potential systemic financial stability implications or interact with macroprudential measures.
  - The authorities followed a model process in 2018 when the FPC considered both FCA and BOE points of view before deciding that, provided they were implemented as intended, the FCA’s proposed reforms to open-ended commercial real estate funds were beneficial to U.K. financial stability.
- Any removal of the FPC’s affordability stress test at this juncture will require careful consideration because mortgage indebtedness has been increasing as measured by mean LTI, a development which threatens to be amplified by the rise in housing prices.
  - The FPC made a well-substantiated judgment in December 2021 that the LTI flow limit is likely to deliver the appropriate level of resilience to the U.K. financial system through the cycle, without the FPC’s affordability stress test.
  - The judgment is supported with strong analysis and clear communication in the FSR. The technical annex to the FSR evaluates the impact of the FPC’s measures on the U.K. housing market to date and expands analysis with a simulation of the impact of the measures in a scenario of rapid house price growth.
  - The analysis concludes that even under extreme assumptions, the LTI limit still delivers the large share of benefits of the FPC’s measures.
  - The FSAP notes that any removal of the FPC’s recommendation of a minimum of 300bp stress test on mortgage reversion rates, at this juncture, will require careful consideration.
  - The mean LTI has increased in recent months to a historical high, mostly driven by an increase in LTI ratios below the 4.5 times LTI flow limit threshold but still above 4.0 times LTI; housing prices are rising fast, which threatens to further increase household indebtedness.
- The FPC and U.K. authorities should continue international work to strengthen resilience of the open-ended fund sector in line with the FPC’s 2019 principles on liquidity management and the 2021 recommendations.
  - An effective liquidity classification framework should play a role in the design of a fund and in determining appropriate redemption terms.
  - The FSAP supports the new LTAF vehicle with proposed redemption notice periods and the principles the BOE and FCA expressed in their proposed framework for liquidity classification and swing pricing in July 2021.
  - The BOE and FCA did not propose any change in policy towards redemption notice periods (the FPC’s third principle from 2019) but noted that an effective liquidity classification framework should play a role in determining appropriate redemption terms.
  - The FPC, in its July 2021 FSR (p. 36), briefly discussed the third principle in the context of the LTAF and property fund proposals but did not mention the much-larger existing fund sector focused on corporate bonds.

*Source: 1gbrea2022005 - 115. The content of the briefing packs and dashboards evolved with the risk environment*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1gbrea2022005.pdf_