2024 O-SII buffer framework review

1: Overview

1. The other systemically important institutions (O-SII) buffer is the UK’s capital buffer for certain domestic systemically important firms. The Financial Policy Committee (‘the FPC’ or ‘the Committee’) must have a framework for the O-SII buffer and review this framework as per the legally mandated cycle, while the Prudential Regulation Authority (PRA) is responsible for setting firms’ O-SII buffer rates at least annually, based on the FPC’s framework.^{footnote [1]}

2. The O-SII buffer framework aims to address the risk that a distressed ring-fenced bank or large building society disrupts the supply of credit to the real economy. Given that risk, the framework recognises that domestic systemically important firms may warrant higher capital requirements to enable them to absorb stress, and so sets O-SII capital buffers for some firms. Following the FPC’s 2023 review of the framework, the Committee announced that it intended to assess in 2024 whether the current thresholds used to set firms’ O-SII buffers continued to remain appropriate in the context of the intended aims of the framework.^{footnote [2]}

3. Accordingly, in 2024, the FPC reviewed the O-SII buffer framework and decided^{footnote [3]} to consult on proposals to: (1) index the O-SII buffer thresholds based on the cumulative growth in nominal GDP between 2019 and 2023; and (2) assess the thresholds as part of the FPC’s regular review of the framework in the future and update them in line with nominal GDP growth, as appropriate.

4. The proposals aim to ensure that the framework still operates as intended by the FPC, consistent with its primary objective to maintain financial stability, without undue tightening. The Committee recognises that the UK has seen substantial growth in nominal GDP since the thresholds were implemented in 2019, impacting financial sector activity. If the nominal thresholds remain unchanged, more firms would be captured under the framework over time, and those already captured would move into higher buffer rate buckets, with those changes not necessarily reflecting an increase in firms’ potential to disrupt the credit supply. Thus, updating the thresholds supports the efficient allocation of capital and supports lending to the real economy, in line with the FPC’s secondary objective to support the Government’s economic policy.

5. In light of its assessment, the FPC proposes to increase O-SII buffer thresholds based on the 20% cumulative growth in nominal GDP between 2019 and 2023 to ensure the framework reflects the original risk appetite of the Committee.

6. If FPC decides, following this consultation, to confirm these proposed changes to the O-SII buffer thresholds in its final policy, the PRA will reissue 2024 O-SII buffer rates to reflect the changes.^{footnote [4]} This will ensure that firms benefit from the increased thresholds without delay. The reissued rates would apply from 1 January 2026.

7. To ensure the framework continues to operate as intended in the future, and to avoid significant one-off increases in the threshold, the FPC proposes to assess the thresholds as part of its regular reviews of the framework – which take place at least every three years^{footnote [5]} – and to update them in line with nominal GDP growth, as appropriate. If avoiding any significant one-off increases in the future required such reviews to be brought forward, the FPC could still consider doing so. To ensure firms can benefit from any such threshold adjustments immediately, future indexation will be communicated through the FPC Record without further consultations. The updated thresholds will then be used by the PRA for its subsequent O-SII buffer rate setting, in line with its statement of policy.

8. This consultation is relevant to PRA-regulated firms that are subject to the O-SII buffer.

Responses and next steps

9. The consultation will close on 30 May 2025. All responses should be emailed to OsiiBufferFramework2024@bankofengland.co.uk.

2: Background

Framework for the O-SII buffer

10. The economy depends on critical financial services provided by financial institutions, including large banks and building societies. Given the damage that large, systemically important institutions could cause to the UK financial system and economy if they were close to failure, it is important to ensure such firms have the capacity to withstand stress. And, to maintain financial stability, it is important that such institutions have levels of capital that are sufficient to absorb losses in stress to enable them to continue to maintain critical financial services, particularly the provision of credit to the real economy.

11. The international Basel framework for global systemically important banks (G-SIBs) has been implemented through European and UK legislation. This framework sets higher capital buffers for G-SIBs. The Basel framework also recognises that institutions can be systemically important in a domestic context and that those firms may likewise warrant higher capital to absorb stress. This additional capital may take the form of an explicit loss-absorbing buffer for domestic systemically important banks (D-SIBs). The O-SII buffer is the UK’s capital buffer for UK D-SIBs and applies to PRA-regulated firms within the scope of the O-SII buffer.^{footnote [6]}

12. Under UK legislation (The Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014), the FPC must maintain a framework for setting O-SII capital buffer rates, while the power to set an O-SII buffer for a given firm in a given year falls to the PRA.

13. When the FPC instituted the O-SII buffer framework, it considered that the main channel through which distressed firms could cause damage to the financial system and real economy was through the contraction of their household and corporate lending. The Committee therefore decided to use a measure of firms’ assets as a proxy indicator for this channel and determine O-SII buffer rate buckets.^{footnote [7]}

14. Initially, the FPC set O-SII buffer rates based on firms’ ‘total assets’. However, balance sheet movements during the Covid shock demonstrated that total assets and lending do not necessarily move together over time in a stress.

15. Therefore, in the FPC’s 2021 review of the framework, the Committee changed the key metric for determining O-SII buffer rates from total assets to the UK leverage exposure measure (LEM).^{footnote [8]} The change to LEM was made to exclude firms’ holdings of central bank reserves from the framework – as the supply of central bank reserves expanded during the pandemic but the resulting increase in firms’ total assets did not reflect a change in their potential to disrupt the credit supply – and bring into it committed but undrawn credit facilities that can form an important part of the credit supply in stress. The Committee decided that by including committed but undrawn credit facilities, LEM better reflected the increase in net lending by major UK firms during the Covid shock.

16. At that time, the thresholds were set based on firms’ 2019 financial results, the year prior to the large expansion in central bank reserves during the pandemic, to ensure a mapping between total assets and LEM that did not represent an overall tightening or loosening of the framework relative to its pre-Covid levels.^{footnote [9]} Table 1 shows the current LEM-based thresholds and the corresponding O-SII buffer rates.

FPC’s 2024 review of the O-SII buffer framework

17. The FPC recognised that indexing thresholds may be necessary when it introduced the O-SII buffer framework, noting that thresholds ‘could be adjusted in the future (for example in line with nominal GDP or inflation) as part of the FPC’s regular reviews of the framework’. In its response to feedback received during its 2021 review, the Committee noted that ‘if it judges that the absence of threshold indexation could be adversely impacting the intended aims of the framework, the FPC will conduct analysis on the case for indexing the thresholds as part of its next review’.^{footnote [10]} In its 2023 Q3 Record, the Committee noted its intention to ‘assess in 2024 whether the current buffer thresholds continued to remain appropriate in the context of the intended aims of the framework’.^{footnote [11]}

18. In the course of this assessment, the Committee recognised that the UK has seen substantial growth in nominal GDP since the thresholds were last set. Over time, thresholds set in nominal terms can ‘tighten’, resulting in more firms being captured under the framework, and those already captured moving into higher buffer rate buckets, without them necessarily increasing in their systemic importance to the economy. This can occur as a result of nominal economic growth over the period since the thresholds were implemented, which is in turn driven by both real economic growth and price inflation. PRA CEO Sam Woods has referred to this as ‘prudential drag’.

19. Therefore, in the 2024 Q4 Record, the FPC announced its intention to consult on proposals to: (1) index the O-SII buffer thresholds based on the 20% cumulative growth in nominal GDP between 2019 and 2023; and (2) assess these thresholds in the future as part of its regular reviews of the framework.^{footnote [12]} These proposals support the efficient allocation of capital and lending to the real economy, in line with the FPC’s secondary objective to support the Government’s economic policy, including its objectives for growth and employment, while maintaining the resilience in the system set in the original framework, without undue tightening, in accordance with the FPC’s primary financial stability objective.

3: FPC proposal

Indexing O-SII buffer thresholds using growth in nominal GDP

20. The FPC proposes to index the O-SII buffer thresholds by the cumulative growth in nominal GDP of 20% between 2019 and 2023.^{footnote [13]} This would ensure that the framework reflects broadly the same level of risk appetite as when the FPC last set the O-SII buffer thresholds based on 2019 data. The FPC judges that updating the thresholds by that amount would ensure that the framework operates as intended and without undue tightening.

21. The indexed thresholds have been rounded to the nearest £5 billion, ensuring that the buckets continue to remain of equal sizes, an important feature of the FPC’s O-SII buffer framework.^{footnote [14]}

22. The proposed indexed thresholds are set out in the third column in Table A; the current thresholds are in the second column.

23. The FPC does not propose any other changes to the framework and seeks industry feedback on its proposal.

Choice of nominal GDP growth metric for indexation O-SII buffer thresholds

24. The FPC assessed a range of indicators to reach a judgement on the metric that was best to use to index the thresholds. On balance, the FPC judged that nominal GDP was the most appropriate indexation metric, as it accounts for both inflation and real growth in the economy, which are important drivers of financial sector activity in the medium term. Nominal GDP also reflects the impact of broad, economy-wide growth on the financial sector. It was also judged to be more suitable than using a measure of the size of the financial sector, as that would not take into account changes in the size of the financial system relative to the economy, which is an important factor relating to risk appetite.

Choice of time-period for indexing O-SII buffer thresholds

25. The FPC’s objective in indexing the thresholds is to address the unintended tightening in the framework due to the impact of growth and inflation on firms’ balance sheets, as opposed to a recalibration of its risk appetite.

26. When the FPC last set the thresholds in its 2021 framework review to change the metric for determining the O-SII buffer rates from total assets to LEM, the thresholds were updated based on December 2019 data. The FPC has therefore used 2019 as the base year for calculating nominal GDP growth.

27. Given 2023 was the latest complete annual data available at the time of the FPC’s decision to index the thresholds, the FPC proposes to raise the thresholds by the cumulative growth in nominal GDP between 2019 and 2023. Future indexation will therefore use 2023 as the starting point.

Future reviews of O-SII buffer thresholds

28. To ensure the framework continues to operate as intended in the future, and to avoid significant one-off increases in the threshold, the FPC proposes to assess the thresholds as part of its regular reviews of the framework – which will take place at least every three years^{footnote [15]} – and to update them in line with nominal GDP growth, as appropriate. If avoiding significant one-off increases in the thresholds in future requires such reviews to be brought forward, the FPC could still consider doing so. To ensure firms benefit immediately from any such threshold adjustments, future indexation will be communicated through the FPC Record, without further consultations. It will then be used by the PRA for its subsequent O-SII buffer rate setting in line with its statement of policy.^{footnote [16]}

Implementation

29. If, following this consultation, the FPC decides to confirm these proposals as its final policy, the PRA will reissue 2024 O-SII buffer rates (based on firms’ 2023 LEM data). Those buffer rates will apply from 1 January 2026.^{footnote [17]} This would ensure that firms benefit from indexed thresholds, in the form of greater LEM headroom, without delay.

4: Cost benefit analysis

30. The proposals in this consultation aim to ensure that the O-SII buffer continues to address financial stability risks in line with the FPC’s risk appetite, as set out in its framework, while also avoiding any undue tightening over time.

31. Overall, the FPC expects some benefits for firms in scope of the O-SII buffer as a result of its proposals. The proposed indexation of thresholds will result in greater headroom being available for firms, while maintaining the same level of resilience in the system set in the original framework, in accordance with the FPC’s primary financial stability objective. The increased headroom to the first, and subsequent, thresholds will provide greater space for firms to grow before facing an increase in capital requirements, thereby facilitating greater competition, and which could translate into additional lending, supporting the FPC’s secondary objective.^{footnote [18]}

32. The increased headroom would also mitigate any risk of firms seeking strategies to counteract an inadvertent tightening of the framework. Such strategies could include reducing lending to the economy in order to manage their LEM, for example to avoid crossing into the next buffer rate bucket threshold and the associated increase in capital requirements.

33. There could be some small costs from these proposals in terms of financial stability, as a result of lower O-SII buffers applying to a bigger population of firms than would otherwise be the case, but these are not considered to be material, and they are within the original risk appetite underlying the framework, with O-SII buffers continuing to apply to the firms that are domestically, most systemically important. By maintaining the same risk appetite, it will continue to be in accordance with the FPC’s financial stability objective.

34. The Committee does not expect the proposed new thresholds to introduce any new costs on firms.

35. The FPC has assessed the policy proposals in this consultation paper and does not consider that the proposals give rise to equality and diversity implications.

36. The FPC is required to review its O-SII buffer framework as per the legally mandated cycle so will assess the impact of these proposals on an ongoing basis.

Annex

The FPC would implement the proposals in this consultation paper by adding a new box to the framework.