Friday, 15 December, 2017

Bank of England tightens capital requirements as debt surges

Bank of England financial stability report GETTYThe Bank of England has expressed concern over household debts
Edmund Collier | 29 June, 2017, 09:05

The decision was unveiled alongside the Bank's twice-yearly Financial Stability Report and is a signal that the Bank feels the risks of a credit crunch have now receded and it is more concerned about an excess of lending. Previously some banks were able to game the system by assuming they'd pass along less than the full 3 percent increase to borrowers, the BOE said.

The Bank's financial policy committee has raised the counter-cyclical capital buffer rate from zero to 0.5 per cent, which must be complied with from June 2018.

The industry can cope with the demands: United Kingdom banks' combined common equity Tier 1 capital ratio was 13.9 percent in March, and their combined leverage ratio is over 5 percent, well above the BoE's proposed minimum of 3.25 percent.

"Consumer credit has increased rapidly", Governor Mark Carney said.

About two-thirds of private new vehicle buyers do so through personal contract purchase (PCP) deals - usually from the auto makers, but often from banks.

The Bank's assessment said loss rates on consumer lending "are low at present", driving margins on new lending lower.

Borrowers often do everything they can to pay off mortgages, but are less afraid about defaulting on credit cards or auto loans.

Carney said the boom in vehicle loans is a major factor behind the pick-up in consumer debt, but that he remained "sanguine" about the banking sector's overall exposure to it.

These allow people to secure cars for monthly payments in a finance arrangement that means the owner in effect leases a vehicle for three or four years rather than buying it outright.

In March, the Bank highlighted consumer credit as a greater risk than buy-to-let mortgages.

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Even so, the FPC remains anxious about signs of excess, particularly in vehicle finance and credit cards.

Consumer credit, which excludes mortgages, grew by 10.3 per cent in the year to April, the fastest rate since 2005.

The report called on banks to tighten affordability tests for home loans.

"The current environment is also likely to have improved the credit scores of borrowers", it said.

However, the Bank has found a range of approaches being applied by lenders resulting in inconsistencies across the market.

"Lenders may be placing undue weight on the recent performance of loans in benign conditions", the FPC said.

His comments come after Andy Haldane, the Bank's chief economist, surprised markets last week by signalling that he was poised to vote for a rate hike in the second half of the year if growth remains stable. Carney said that if wage growth picks up and business investment increases then he will reconsider the case for holding the BOE's benchmark rate at a record low of 0.25%.

Bank of England deputy governor Sir Jon Cunliffe has joined the debate over raising United Kingdom interest rates, indicating now is not the right time for a rise.

The primary responsibility of the Financial Policy Committee (FPC), a sub-committee of the Bank of England's Court of Directors, is to contribute to the Bank of England's objective for maintaining financial stability.

Carney said the FPC's action did not in itself imply that monetary policy was also about to tighten.

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