Financial Stability Report

It is the Bank of England stability review of the United Kingdom financial system as a whole. It is prepared by the Financial Policy Committee (FPC), the Bank committee responsible for macroprudential policy, policy that limits system-wide financial risk. The FPC identifies the risks faced by the system and weighs them against measured resilience, with no single formula, index, or weighting.

It rests on Section 9W of the Bank of England Act 1998, as amended by the Financial Services Act 2012. Each issue is presented to Parliament pursuant to Section 9W(10). Running since October 1996 as a biannual Financial Stability Review, it took the report name in 2006 and became a statutory twice-yearly duty in 2013. It is not a monetary policy decision, inflation forecast, or rate forecast, since those belong to the Monetary Policy Committee and its Monetary Policy Report.

It appears twice per calendar year, normally one mid-year edition around June or July and one end-year edition around November or December. It is published on the Bank website, usually in the morning United Kingdom time, with the end-year edition advertised for 10.30am.

Each issue uses data available as at a stated cut-off date a few days before publication. Issues are never revised and stay in the archive unchanged, though policy views can change at later meetings.

Each issue arrives with the FPC meeting Record for the quarter, a press conference, and downloadable chart data. The end-year edition adds the annual stress test results for major United Kingdom banks.

No single formula moves the report. Standing sections track risks and resilience, joined by a rotating focus topic. A past focus covered growth support and funding for high-growth small firms.

• Developments in financial markets: market volatility, asset valuations, and core government bond and repo market functioning.
• Global vulnerabilities: global risk outlook and public, household, and corporate debt abroad.
• United Kingdom household and corporate debt vulnerabilities: mortgage trends and the loan-to-income flow limit, a cap on risky mortgage share.
• United Kingdom banking sector resilience: bank capital and liquidity buffers, credit provision, and links with non-bank lenders.
• Resilience of market-based finance: risks in non-bank finance, gilt repo market resilience, private markets, and risk monitoring tools.
• Annex: macroprudential policy decisions, including the countercyclical capital buffer rate decision.

The 05 July 2016 issue shows the mechanism, after the FPC had named referendum risks in March as the top near-term domestic risk. It followed the 23 June 2016 referendum on United Kingdom membership of the European Union, as some risks began to crystallise.

Between 23 June and 01 July the sterling exchange rate index fell by 9%, while short-term sterling-dollar volatility hit a post-Bretton Woods high. Bank shares fell on average by 20% and domestic shares by 10%. The 10-year government bond yield fell by 52 basis points and corporate bond yields by about 25 basis points.

The FPC cut the buffer from 0.5% to 0% with immediate effect. That freed 5.7 billion pounds of buffers for up to 150 billion pounds of extra lending, holding at 0% until at least June 2017.

1. Judgement, not a formula: the FPC identifies risks to the United Kingdom financial system and weighs them against measured resilience. In symbols, Judgement equals Weigh of identified risks against measured resilience, with no numeric aggregation rule.
2. Illustrative buffer arithmetic: the 2016 buffer cut from 0.5% to 0% reduced buffers by 5.7 billion pounds. It added up to 150 billion pounds of lending capacity. Implied multiple: 150 divided by 5.7, about 26.
3. Neutral setting: the neutral countercyclical capital buffer setting is 2%, moved up or down on the domestic assessment.