The United Kingdom's HM Treasury and the Bank of England update their financial relationship memorandum and reaffirm the Bank’s capital framework

HM Treasury and the Bank of England published an updated Memorandum of Understanding on their financial relationship and a joint statement concluding the five-year review of the Bank’s capital framework parameters. The review found the framework introduced in 2018 remains effective and that the existing parameters and financial arrangements continue to be adequate, including for the Bank’s planned move to a demand-driven operating framework backed by repo. The updated MoU takes effect immediately and maintains the Bank’s capital and income-sharing framework, including the target, floor and ceiling for loss-absorbing capital, which the documents reference as GBP 3.5bn, GBP 0.5bn and GBP 5.5bn respectively. It also sets out the principles for which balance sheet operations are backed by the Bank’s own capital versus those that may require HM Treasury indemnity, the process for loss reporting and potential recapitalisation if capital is expected to breach the floor, and routine information-sharing on the Bank’s budget, financial performance and risks. Both institutions will keep the arrangements under review during the Bank’s balance sheet transition to a new steady state. The MoU also notes that the capital framework parameters are to be reviewed at least every five years and that the Bank of England Levy will be reviewed five years after 1 March 2024, with subsequent reviews every five years.