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UK stress test to include tougher capital hurdles in 2018

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UK stress test to include tougher capital hurdles in 2018

The U.K. stress test scenario for 2018 will be the same as that used in 2017, but banks will need to pass tougher capital hurdles, primarily due to new accounting rules, called IFRS 9, that require booking loan losses sooner.

Discussing British financial stability, the Bank of England's Financial Policy Committee said companies have seen signs of their risk appetite rising in recent quarters, as the issuance of leveraged loans and high-yield bonds by U.K. companies increased in 2017.

The committee said March 16 more loans are issued close to the BoE's loan-to-income ratio ceiling of 4.5. In addition, valuations in some commercial real estate markets appear stretched.

However, aggregate private nonfinancial sector debt has increased only a little faster than GDP over the past couple of years and, relative to incomes, remains well below pre-crisis levels. Debt-servicing costs for both households and companies are low, the committee noted.

In addition, the U.K.'s current account deficit is large by international standards, with foreign investors increasingly financing the current account deficit over recent quarters.

Meanwhile, Brexit continues to post "material risks" to financial services, despite progress made to mitigate these risks. However, the committee noted that Brexit risks did not warrant additional capital buffers for banks. The countercyclical capital buffer rate was maintained at 1%.

A "provisional" transition deal could be reached next week, if London and the bloc are able to resolve divorce matters, a senior Brussels diplomat told Reuters. British Prime Minister Theresa May hopes to secure the bloc's preliminary approval for a two-year transition deal at an EU summit March 22 and March 23.

A key EU official recently said the European financial sector is well-prepared to deal with a hard Brexit should the U.K. leave the EU without a transitional agreement in place to maintain access to the single market. The FPC echoed similar sentiment March 16.

"The U.K. banking system could continue to support the real economy through a disorderly Brexit," the FPC said.

The committee believes crypto-assets do not currently pose a material risk to U.K. financial stability. However, if they were likely to become widely used for payments, or as assets intended to store value, the FPC would require current standards to be applied to relevant payments and exchanges.