UK Countercyclical Capital Buffer Rate

Bank Of England Financial Stability Report, June 2017

To ensure that the financial system has the resilience it needs, the Financial Policy Committee is increasing the UK countercyclical capital buffer rate to 0.5%, from 0%. Absent a material change in the outlook, and consistent with its stated policy for a standard risk environment and of moving gradually, the FPC expects to increase the rate to 1% at its November meeting.

The countercyclical capital buffer guide is a metric that provides a guide for the CCB rate based on the gap between the ratio of credit to GDP and its long-term trend.

The countercyclical capital buffer guide suggests that a credit gap of 2% or less equates to a CCyB rate of 0% and a credit gap of 10% or higher equates to a CCyB rate of 2.5%.

The latest comment mentions the risk that a disorderly Brexit could bring to the system.

There are pockets of risk that warrant vigilance. Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. Lenders may be placing undue weight on the recent performance of loans in benign conditions.

Exit negotiations between the United Kingdom and the European Union have begun. There are a range of possible outcomes for, and paths to, the United Kingdom’s withdrawal from the EU.

Some possible global risks have not crystallised, though financial vulnerabilities in China remain pronounced. Measures of market volatility and the valuation of some assets — such as corporate bonds and UK commercial real estate — do not appear to reflect fully the downside risks that are implied by very low long-term interest rates.

Credit to GDP has been rising sharply since mid 2015 but is still historically very low - lower than at any time since 1966 when the graph starts. So why the added caution?