Resilience of the UK financial sector

Resilience of the UK financial sector

The Bank of England’s Financial Stability Report sets out its view on the UK’s economic and financial outlook and assesses the strength of the financial system, as well as the key risks to its stability. The December 2021 report has a section dedicated to “Banking sector resilience”, which also describes the results of the 2021 “solvency stress tests”.

Highlights from the “Resilience of the UK Banking Sector” section:

  • The banks’ capital and liquidity position remain strong. The total capital ratio (CET1) for the sector, at the end of the third quarter of 2021, is 16.5% (1.7 percentage points more than before the start of the pandemic). Banks maintain a level of approximately 1.5 times the minimum required liquidity coverage ratio.
  • The level of bank capital is expected to decline in the coming quartersdue to distributions to shareholders and some regulatory changes.
  • The UK’s countercyclical capital buffer (CCA) has been increased from 0% to 1%.. The new rate will come into effect from December 13, 2022. It is expected that banks will be able to meet this increase without the need to increase capital to strengthen their capital positions, and despite the downward trend in overall capital levels.
  • Credit quality: Credit quality indicators have remained generally stable since the previous report (last July) supported by the economic recovery and government support programs (some of which are nearing their end and will mean greater financial vulnerability for some borrowers). UK banks issued a small amount of provisions (£900m) out of £22bn made available during the previous stages of the pandemic. The banking system’s provision stock currently stands at £31.4 billion, which is higher than the necessary provisions according to its risk models.
  • Bank Solvency Stress Test (SST) in 2021The main conclusion is that the UK banking system remains resilient in the face of a much riskier economic scenario than the central one predicted by the Bank of England. No individual entity, out of the eight entities analyzed, is below the minimum required levels of capital and leverage. British banks will be able to continue supporting households and businesses in the worst-case scenario. The system’s total capital ratio (CET1) will decrease by 5.5 percentage points to a minimum level of 10.5% (compared to the minimum requirement of 7.6%).
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