The Bank of England and HM Treasury financial relationship

Statement

I can announce today the conclusion of a Bank of England and HM Treasury 5-yearly review of the Bank’s capital framework parameters, as set out in Section 2B of the Bank and HM Treasury Financial Relationship Memorandum of Understanding (MoU).

The Review concluded that:

• the capital framework has been effective in delivering its intended objectives at inception in 2018: to ensure that the Bank is equipped with capital resources consistent with the monetary and financial stability remits it has been given by Parliament.
• the existing parameters of the capital framework remain adequate to support the Bank’s balance sheet. [1]
• the existing Bank-HMT financial arrangements, as set out in the MoU, are sufficient to support the Bank’s planned transition to a demand-driven operating framework fully backed by repo. [2]

The Bank and HM Treasury will keep these arrangements under review during the Bank’s balance sheet transition to a new steady state in coming years, ensuring close engagement as per the existing governance and information sharing channels set out in the MoU.

The Bank and HM Treasury have updated the MoU accordingly: https://www.gov.uk/government/publications/memorandum-of-understanding-between-hm-treasury-and-the-bank-of-england-2025

[1] The parameters of the capital framework include a target, a floor, and a ceiling. As set out in the 2018 letter from the Governor of the Bank of England to the Chancellor, the values of the capital parameters are £0.5bn for the floor, £3.5bn for the target and £5.5bn for the ceiling.

Letter from the Governor to the Chancellor - 21 June 2018

[2] Further detail on the transition of the Bank’s operating framework can be found at:

• Transitioning to a repo-led operating framework | Bank of England
• The importance of central bank reserves - lecture by Andrew Bailey | Bank of England
• Let’s get ready to repo! - speech by Victoria Saporta