BoE says banks should tighten buy-to-let lend­ing stan­dards

The Pak Banker - - COMPANIES/BOSS -

The Bank of Eng­land said banks should be­gin build­ing up cap­i­tal ear­marked to sup­port lend­ing when the econ­omy turns down, as the outlook for UK fi­nan­cial sta­bil­ity wors­ens.

The BoE's Fi­nan­cial Pol­icy Com­mit­tee raised the coun­ter­cycli­cal cap­i­tal buf­fer rate for U.K. ex­po­sures to 0.5 per­cent of risk-weighted as­sets from zero, be­com­ing bind­ing from March 29 next year. The buf­fer ap­plies to UK banks and build­ing so­ci­eties, as well as to branches of other Euro­pean Union banks that lend into the coun­try.

"Risks as­so­ci­ated with do­mes­tic credit are no longer sub­dued," and global risks "which can also af­fect UK ex­po­sures in­di­rectly, are height­ened," the FPC said in ex­plain­ing its de­ci­sion. The June 23 ref­er­en­dum on the UK's membership of the EU is the source of "the most sig­nif­i­cant neart­erm do­mes­tic risks to fi­nan­cial sta­bil­ity," the reg­u­la­tor said in a state­ment.

The BoE said it in­tends to set the coun­ter­cycli­cal cap­i­tal buf­fer at about 1 per­cent in a "stan­dard risk en­vi­ron­ment." The aim of the mea­sure is to push against banks' ten­dency to boost lend­ing in boom times only to slash it in a bust, ex­ac­er­bat­ing dam­age to the econ­omy.

The cen­tral bank also wants to use the buf­fer to help sim­plify its cap­i­tal re­quire­ments and make them more trans­par­ent.

To­ward this end, over­lap­ping el­e­ments of ex­ist­ing bank-spe­cific cap­i­tal buf­fers will be re­duced, "where pos­si­ble," by 0.5 per­cent as the coun­ter­cycli­cal buf­fer is in­creased, the FPC said. As a re­sult, "banks ac­count­ing for around three quar­ters of the out­stand­ing stock of U.K. lend­ing will not see their over­all reg­u­la­tory cap­i­tal buf­fers in­crease," the reg­u­la­tor said. This is a "one-off ad­just­ment re­flect­ing the tran­si­tion to the new cap­i­tal frame­work," it said.

A coun­ter­cycli­cal lever­age ra­tio buf­fer will be set at 35 per­cent of the riskweighted buf­fer, ap­ply­ing only to big U.K. banks and build­ing so­ci­eties. "The bank is creat­ing room on the down­side, space that can be used if there's a Brexit, for ex­am­ple," Philip Rush, U.K. econ­o­mist at No­mura In­ter­na­tional Plc in Lon­don, said be­fore Tues­day's de­ci­sion. "It's ba­si­cally a neu­tral re­al­lo­ca­tion of cap­i­tal within the cur­rent struc­ture. There are some large fi­nan­cial im­bal­ances in the U.K. econ­omy that could cor­rect if there's a Brexit."

On risks to sta­bil­ity from the EUmem­ber­ship ref­er­en­dum, the FPC said the ef­fect so far "has been most marked in ster­ling spot and op­tions mar­kets," and "height­ened and pro­longed un­cer­tainty has the po­ten­tial to in­crease the risk pre­mia in­vestors re­quire on a wider range of UK as­sets." The FPC said some mar­ket de­vel­op­ments "motivate care­ful re­view" and con­sid­er­a­tion of pos­si­ble changes to in­ter­na­tional rules to pro­mote "mar­ket ef­fec­tive­ness."

"Some mea­sures of liq­uid­ity, such as bid-ask spreads, do not sug­gest de­te­ri­o­rat­ing con­di­tions," the FPC said. "How­ever, the Com­mit­tee also places weight on in­di­ca­tions of lower mar­ket depth, smaller trade sizes on av­er­age and greater price im­pact of as­set sales."

Of­fi­cials plan to feed the re­sults of stress tests, which the banks un­dergo an­nu­ally, into the cal­cu­la­tion of buf­fer rates. The BoE pub­lished the key el­e­ments of its 2016 stress test, which is ap­plied to banks and build­ing so­ci­eties with to­tal re­tail de­posits of more than 50 bil­lion pounds.

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