Section 3: Medium-term risks to financial stability

1. Section 3: Medium-term risks to financial stability

2. Table 3.A Medium-term policy priorities

3. Table 3.B Basel III increases the share of high-quality capital within the 8% total risk-weighted capital requirement(a)(b)(c) • Sources: BCBS and BIS. • (a) The table shows the requirements at full implementation of Basel III, which is envisaged in January 2019. • (b) The table only includes capital requirements that apply to all banks (Pillar 1) and not the firm-specific (Pillar 2A) requirement. • ‘Going concern’ loss-absorbing capacity refers to a bank’s capacity to absorb losses without becoming insolvent. ‘Gone concern’ loss-absorbing instruments included in • Tier 2 capital are those that can absorb losses once a bank’s Tier 1 capital is depleted (eg through debt restructuring and haircuts).

4. Chart 3.1 Banks will be required to fund themselves with more ‘high-quality’ capital over time Basel III Pillar 1 risk-weighted capital requirement(a)(b)(c) • Sources: BCBS, BIS and Bank calculations. • CRD IV allows countries to set the minimum CET1 ratio in the range of 4%–4.5% (Basel III: 4%) and the minimum Tier 1 ratio in the range of 5.5%–6% (Basel III: 5.5%) in • 2014. • (b) Capital conservation buffer consists of CET1 capital. • (c) There is no explicit Basel II standard mandating a 2% minimum CET1 requirement, but it is generally understood that CET1 should form the predominant part of Tier 1 • capital.

5. Table 3.C FPC and PRA can impose additional capital requirements and buffers Capital requirements under full implementation of Basel III in 2019(a)(b) • Sources: BCBS, BIS, HM Treasury, ICB and PRA. • (a) Under CRD IV, capital buffers are expected to consist of common equity (CET1). • (b) G-SIBs are global systemically important banks as identified by the FSB. The equity buffer for ring-fenced banks will be the higher of the G-SIB buffer and the ring-fence • buffer (to be introduced through the CRD IV ‘systemic risk buffer’). Domestic systemically important banks are yet to be identified and the level of capital surcharge is • yet to be decided. • (c) Macroprudentialcapital buffers consist of countercyclical capital buffer and sectoral capital requirements. • The total capital requirements for a firm may be greater than the numbers in (3) if a firm-specific capital requirement (Pillar 2A), macroprudential capital buffers or • additional firm-specific capital buffer (Pillar 2B) are applied.

6. Table 3.D Pillar 1 and Pillar 2 capital requirements try to deal with different sources of risks(a) Source: Bank of England. (a) The table covers the Pillar 2A capital requirement, and not the Pillar 2B capital buffer.

7. Table 3.E A range of measures may be required to tackle the ‘too big to fail’ problem Examples of ex-ante and ex-post policy measures Source: Bank of England.

8. Chart 3.2 Global systemically important banks are required to fund themselves with additional capital G-SIBs capital surcharge transition path by ‘bucket’ classifying banks by systemic importance(a)(b) • Sources: BIS, CRR, FSB and Bank calculations. • Firms in bucket 4 are considered to be the most systemic of the G-SIBs. The FSB’s November 2013 G-SIB list includes HSBC (bucket 4), Barclays (bucket 3), Royal Bank of • Scotland (bucket 2) and Standard Chartered (bucket 1). • (b) Surcharge increases take effect as of 1 January of each year.

9. Chart 3.3 CCPs risk insolvency without a mechanism to allocate exceptional losses A typical CCP default waterfall in the absence of a loss-allocation rule Source: Bank of England.

10. Chart 3.4 Non-bank financial intermediaries’ assets continue to increase in dollar terms Covering 20 FSB member jurisdictions and euro area(a) Source: FSB. (a) Twenty jurisdictions and euro area.

11. Table 3.F The FSB proposed a minimum haircut for certain types of securities-against-cash transactions(a) • Source: FSB. • Numerical haircut floors for securities-against-cash transactions proposed by the FSB are aimed at non-centrally cleared transactions involving entities not subject to • regulation of capital and liquidity/maturity transformation using non-government collateral.

12. Chart 3.5 The proposed haircut would apply to a relatively small subset of the transactions Transactions subject to proposed floors, as of 2012 Source: FSB.

13. Chart 3.6 Global securitisation markets are yet to recover European and US securitisation issuance(a)(b) Sources: Association for Financial Markets in Europe, Securities Industry and Financial Markets Association statistics and Bank calculations. (a) US data updated to end-October 2013 and European (including Turkey, Kazakhstan, the Russian Federation and Iceland) data to end-September 2013. (b) European data includes retained securitisation. (c) Collateralised debt obligation. (d) Asset-backed securities. (e) Collateralised mortgage obligation. (f) Mortgage-backed securities. (g) Asset-backed securities, small and medium-sized enterprises and whole business securitisation. (h) Residential mortgage-backed securities, commercial mortgage-backed securities and mixed mortgage-backed securities.