BoE sees credit crunch risk from 'Brexit'
Uncertainty around Britain's EU membership has added to risks to the economic outlook for the UK, the Bank of England said on Tuesday, adding that a departure could lead to a credit crunch.
The bank's Financial Policy Committee said the impact of a decision to leave the EU “could spill over to the euro area, driving up risk premia and further diminishing the prospects for growth there”.
It added that the outlook for financial stability in the UK had deteriorated since it last met in November 2015.
“Some pre-existing risks have crystallised, drawing on the resilience of the system. Other risks stemming from the global environment have increased. Domestic risks have been supplemented by risks around the EU referendum,” it said in a statement.
The committee said the effect of uncertainty had been most marked in sterling spot and options markets.
“Looking ahead, heightened and prolonged uncertainty has the potential to increase the risk premia investors require on a wider range of UK assets, which could lead to a further depreciation of sterling and affect the cost and availability of financing for a broad range of UK borrowers.”
The BoE said the committee used the results of the 2014 stress test of major UK banks, which incorporated an abrupt change in capital flows, a sharp depreciation of sterling, a marked increase in unemployment and a prolonged recession, as a comparator.
“The results of that test, when combined with revised bank capital plans, suggested that the banking system was strong enough to continue to serve households and businesses during the severe shock. Since then, UK banks' resilience has increased further,” it said.
It also said that while the resilience of the core banking system had improved further since November, underlying liquidity conditions in some markets had continued to deteriorate.
As a result, it had decided to increase the UK countercyclical capital buffer rate to 0.5% from 0% of riskweighted assets with immediate effect.
There was also concern around the rapid growth of the buy-to-let housing market, with the outstanding stock of buy-to-let mortgages rising by 11.5% year-on-year.
“The macroprudential risks centre on the possibility that buy-to-let investors could behave pro-cyclically, amplifying cycles in the housing market, as well as affecting the resilience of the banking system and its capacity to sustain lending to the wider real economy in a stress,” it said.
“The FPC remains vigilant to risks in this area. With a relatively high level of household indebtedness, debt serviceability remains vulnerable to shocks to interest rates, employment or growth.”
It said it expected growth of buy-to-let mortgage lending to slow in the second quarter as higher stamp duty charges take effect.
Looking ahead, the combination of forthcoming changes to mortgage interest tax relief and the implementation of the PRA Supervisory Statement will probably dampen growth of buy-to-let mortgage lending relative to lenders’ plans.