BoE consults on resolvability: BoE is consulting on its approach to exercising its statutory power (stemming from the BRRD) to direct institutions to address impediments to their resolvability. The power applies to:
- UK-authorised banks, building societies and systemically important investment firms;
- parent companies of these institutions that are financial holding companies or mixed financial holding companies; and
- PRA- or FCA-authorised financial institutions that are subsidiaries of these institutions or such parent companies.
BoE proposes guidance on when it might use the power of direction, and gives examples. It seeks comments on its proposed "Statement of Policy" by 22 August. (Source: The Bank of England’s Power to Direct Institutions to Address Impediments to Resolvability)
- describes the approach banks should adopt for the stress test;
- describes how the stress and baseline scenarios should be translated into the specific loss numbers and financial metrics that banks report; and
- defines certain important terms and concepts.
The guidance highlights the differences in this approach from the approach of previous years. There are three important design features to BoE's new approach:
- BoE has, where possible, linked the traded risk stress scenario to the macroeconomic aspects of the scenario;
- BoE now expects banks to apply risk factor shocks of a size that corresponds to the likely liquidity of each position under the stress scenario and hence to the likely time for which each position is exposed to the scenario; and
- BoE's approach to counterparty credit risk requires that banks treat as having defaulted those counterparties/clients that are most vulnerable under the stress scenario.
The guidance then goes on to outline in greater detail all aspects of the methodology. (Source: Stress Testing the UK Banking System: Guidance on Traded Risk Methodology for Participating Banks and Building Societies)