UK Finance responded to the Financial Policy Committee's (FPC) consultation on the design of the other systemically important institutions (O-SII) buffer. The purpose of the O-SII buffer is to ensure that more systemically important banks hold higher capital levels, reducing the impact of their possible failure on the wider economy. It is an analogous, but more localised, version of the G-SIB buffer applied to global systemically important banks (G-SIB), which has the same objective of increasing going-concern loss absorbency.

We supported the FPC's suggestion that the total assets metric be replaced with the Leverage Exposure Measure (LEM), thus excluding central bank reserves. These have built up significantly over the pandemic, distorting the metric. Holding these central bank reserves does not reflect a bank's potential to disrupt credit supply, which is another objective that the O-SII buffer seeks to mitigate. We also agreed that it is sensible to include committed but undrawn credit lines in the LEM as these could be drawn in a period of economic stress.

However, we did suggest that the O-SII thresholds, which have remained static since 2016, be adjusted up in line with GDP growth or inflation, to ensure that the O-SII buffer is applied only to more systemically important banks. Without this adjustment there is the risk that, with the passage of time, less systemically important banks will be drawn into the O-SII buffer regime and be required to hold expensive core equity tier one capital unnecessarily, reducing their ability to compete.

We also suggested, perhaps more controversially, that holdings of gilts, which have very much the same risk profile as central bank reserves to the banks holding them, also be excluded from the O-SII calculation. We observed that as the Bank of England anticipates initiating a Quantitative Tightening programme, banks will be important buyers of its gilt holdings. Because gilts have the same risk profile as central bank reserves, holding assets in the form of gilts, instead of reserves at the Bank of England, does not mean that a bank is of greater systemic importance or has greater capacity to disrupt the UK economy were it to fail.

Finally we noted that the exclusion of central bank reserves from the LEM as outlined in PS21/21 is not permanent but is subject to annual review.  Were this exclusion to be withdrawn there could be unhelpful volatility in banks? capital requirements. This could be avoided by excluding central bank assets from the upcoming one-off recalibration that will be necessary to change from the current total assets metric to the LEM.