BoE considers stronger buffers for banks due to mortgage risks
Banks
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16:43 14/05/24
The Bank of England has warned that lenders have loosened standards on risky mortgages and that it is considering strengthening banks' capital buffers to dampen risk appetite.
The minutes for the March meeting of the BoE’s Financial Policy Committee, chaired by Governor Mark Carney, said there had been “a gradual loosening in credit conditions in the mortgage market in recent years”. The difference between interest charged on 90% loan to value (LTV) mortgages and less risky 75% loans has shrunk over the past two years, it said.
“This was unlikely to reflect an improvement in underlying credit quality” and the share of lending at high loan-to-income ratios has risen and repayment periods have got longer, the minutes said. “Although the share of lending at very high LTV ratios (>95%) remained significantly below pre-crisis levels, the share of lending at LTV ratios just below that had recovered from its crisis troughs,” the committee added.
Consumer credit growth has slowed but “remained elevated”, the committee said. Valuations in some parts of the commercial real estate market appeared stretched, particularly in London where overseas investors continue to buy property.
The committee reviewed its policy on banks’ countercyclical capital buffers (CCyB), which are meant to sit at 1% of risk-weighted assets in normal times. The BoE says that increasing the buffer discourages lending by banks. The committee upped the rate to 1% from 0.5% in November in response to rising consumer borrowing.
The committee left the rate at 1% at its March meeting but noted risks from global trends and “pockets of risk” at home including consumer credit growth, household debt levels and mortgage underwriting standards.
On the other hand, overall credit had grown modestly and more targeted responses to specific risks might be better than a broad capital increase, the minutes said.
“Balancing all these factors, the FPC decided to set the UK CCyB rate at 1%, unchanged from November. It would reconsider the adequacy of the 1% CCyB rate in June with a particular focus on the evolution of domestic risk appetite.”