Bank of England's FPC publishes July financial stability report

The Bank of England's Financial Policy Committee (FPC) has published its July financial stability report alongside the record of its 27 June meeting. After assessing the risks to the UK financial system, the FPC reports that global financial markets remain vulnerable, with elevated risks stemming from geopolitical tensions, trade fragmentation and sovereign debt pressures.

Key topics covered include:

• The FPC agrees to maintain the UK countercyclical capital buffer (CCyB) at 2%, noting that while global risks have intensified since Q1 and the likelihood of severe shocks has increased, domestic risk indicators relevant to UK bank exposures to which the UK CCyB rate was applied, remain close to their long-term averages.
• The FPC acknowledges progress in developing tools to monitor non-bank financial institution (NBFI) leverage, including improved data on exposures and activity in core markets. It has agreed to publish aggregated data to help market participants assess their positioning and strengthen risk management.
• The FPC notes the financial stability benefits of having proportionate regulatory frameworks for systemic and non-systemic stablecoins as proposed by the UK Prudential Regulation Authority (PRA) and UK Financial Conduct Authority (FCA), but emphasises the importance of international coordination to address financial stability risks posed with global stablecoins.
• The FPC considers the findings of the 2024 Cyber Stress Test (CST24) and reaffirms the importance of cyber and operational resilience testing in assessing firms' ability to withstand severe disruption. The FPC views the findings in the CST24 thematic letter as a valuable tool for strengthening firms' analysis and management of operational resilience.
• The FPC recommends that the PRA and FCA amend the implementation of its loan-to-income (LTI) flow limit, after reviewing potential barriers to fuller use of the limit in line with lenders' risk appetites and business models. The proposed change will allow individual lenders greater flexibility to increase their share of high-LTI lending, provided they remain within the 15% aggregate flow limit. In line with this recommendation, the PRA is offering an interim modification by consent to disapply the 15% cap under the current LTI flow limit.

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