Banks must up capital reserves says BoE Financial Stability Report

Mark Carney Bank of England

The Bank of England (BoE) has called for UK banks to put aside an extra £11.4bn to deal with any future economic slowdown in its latest financial stability report.

This was despite remarks by BoE governor Mark Carney that over the past eight years the resilience of UK banks has been significantly improved.

The BoE’s Financial Policy Committee (FPC) has decided to increase the UK countercyclical capital buffer (CCB) rate from 0% to 0.5% of risk-weighted assets. This will apply to banks’ UK exposures from June 27, 2018, giving them a year to comply.

At a press conference today, Carney said: “With the tier one capital ratio for major UK banks now at 15.7%, losses that would have wiped out the entire capital base of the banking system in 2006 can now be fully absorbed by bank capital buffers alone.”

This move is expected to raise regulatory buffers of tier one equity capital by £5.7bn (US$7.28bn). Chris Hare, HSBC economist, says he is not surprised by this move. “The return of the CCB to 0.5% announced today reflects the FPC’s assessment of the risk environment and presumably the fact that the UK financial system has been highly resilient to the referendum result,” he says.

Carney warns of “pockets of risk”

However, Carney has argued that this still was not enough as there are “pockets of risk” that are concerning. He argued a range of outcomes from Brexit were a potential future risk to the UK’s financial stability.

“The inconsistency between the valuation of some assets, such as commercial real estate and corporate bonds, and the risks implied by very low long-term interest rates make those assets vulnerable to a re-pricing whether through an increase in long-term interest rates, adjustments to growth expectations, or both,” Carney said.

“Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. And lenders may be placing undue weight on the recent performance of loans in benign conditions,” said Carney.

The FPC plans to bring forward its assessment of stressed losses on consumer credit lending in the Bank’s 2017 annual stress test. This will inform the FPC’s assessment of whether any extra resilience is required against this lending, the report explains.

Overall consumer credit grew by 10.3% year-on-year in April, which is well in excess of nominal income growth, according to HSBC figures. However, Hare does not think it’s a major concern as consumer credit only makes up a very small proportion of consumer spending and overall lending in the economy. “We also reckon that consumer credit growth will ease back on its own accord over the next couple of years, as households respond to the squeeze from higher inflation on their incomes, and to economic uncertainty relating to Brexit,” he says.

Mixed messages for businesses

Angus Dent, CEO of peer-to-peer (P2P) lending platform, ArchOver, has accused the new report and Carney’s remarks of being “ full of mixed messages” for businesses. “On the one hand, the governor says that rates should not rise in the short-term and the Bank is continuing with economic stimulus to support growth. On the other hand, the Bank is nuancing this with higher lender criteria,” says Dent.

Dent argues: “Tightening consumer lending will always have an adverse effect on business and British Plc won’t be reassured by any of the measures in today’s report.

“It’s an obvious thing to say but consumers buy what business makes. If they buy less then business will suffer. Hearing that customers won’t be able to buy so easily on credit, increases uncertainty and will delay investment decisions and refinancing agreements even further,” he adds.

This reflects a wider problem that Britain is facing, Dent argues, that there is a lack of political consistency plaguing businesses that is creating more uncertainty. “Uncertainty ultimately leads to a decrease in investment at a time when we need to be focused on fostering the health of Britain’s businesses,” he argues.

See the BoE’s visual summary of its latest Financial Stability Report below.

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