Resilience of the financial sector in the United Kingdom

The Bank of England´s Financial Stability Report sets out its view of the outlook for UK financial stability, including its assessment of the resilience of the UK financial system and the main risks to its stability. In the December 2021 report there is a section focused on the “resilience of the UK banking sector”, and a brief description of the Bank’s 2021 solvency stress test results.

Key findings of the “Resilience of the UK banking sector” section:

• Banks’ capital and liquidity positions remain strong. The aggregate CET1 ratio at the end of the third quarter of 2021 stands at 16.5%, 1.7 percentage points higher than before the beginning of the pandemic. Banks have continued to hold around 1.5 times the minimum Liquidity Coverage Ratio required.
   
• Banks’ capital ratios are anticipated to fall over the coming quarters, because of distributions to shareholders and because of a range of regulatory developments.
   
• The UK countercyclical capital buffer (CCyB) rate has been increased from 0% to 1%. The new rate will come into effect from 13 December 2022. Banks are expected to be able to meet an increase of this capital buffer even as capital ratios fall, without needing to strengthen their capital positions.
   
• Asset quality: Banks’ measures of their asset quality have remained broadly stable since the July report supported by the economic recovery and government support schemes (some of which are coming to an end adding financial vulnerability to some borrowers). UK Banks have released a small amount (£0.9 billion) of the £22 billion of provisions they made during earlier phases of the pandemic. The stock of bank provisions currently sits at £31.4 billion, more provisions than their models would imply.
   
• Bank’s 2021 solvency stress test (SST): The main conclusion is that the UK banking system remains resilient to outcomes for the economy that are much more severe than the Bank of England´s central forecast. No individual bank, out of the 8 entities analyzed, falls below the minimum capital levels required. UK banks will be able to continue to support UK households and businesses even in the most adverse scenario. Banks’ aggregate CET1 capital ratio would fall by 5.5 percentage points under the stressed scenario to a low point of 10.5%. (vs the 7.6% reference rate).