The Scotsman

BOE insists on extra capital buffers amid debt bubble

● Banks told to put aside extra £10bn on balance sheet

- By MARTIN FLANAGAN

UK banks will have to earmark an additional £10 billion to help insulate them against consumer credit losses after the Bank of England (BOE) yesterday warned that lenders are “underestim­ating” soaring household debt.

The Bank’s financial policy committee (FPC) said it had decided banks were now in a more risky position even though climbing debt levels did not pose immediate risks to the British economy.

The FPC, whose remit is systemic risk, credit bubbles and economic growth, said: “Within a benign overall domestic credit environmen­t, there is a pocket of risk in the rapid growth of consumer credit.

“This is not a material risk to economic growth, as consumer credit represents only 11 per cent of overall household debt. It is a risk to banks’ ability to withstand severe economic downturns.”

The FPC acknowledg­ed that the quality of consumer credit had improved significan­tly since the financial crash of 2008, but warned that lenders were using the wrong benchmarks.

“Lenders overall are placing too much weight on the recent performanc­e of consumer lending in benign conditions as an indicator of underlying credit quality. As a result, they have been underestim­ating the losses they could incur in a downturn,” the regulator added.

It said it believed that commercial banks were exposed to collective potential losses of about £30bn. That is £10bn more than previously estimated by policymake­rs, and representi­ng about one-fifth of consumer credit loans.

The FPC added that new capital buffer requiremen­ts will be set for individual lenders after the next set of stress test results are published on 28 November ”so that each bank can absorb its losses on consumer lending, alongside all the other effects of the stress scenario on its balance sheet”.

The Bank’s stress test exercises are meant to measure the strength of banks’ balance sheets to handle an exceptiona­l economic and financial markets’ downturn – previously including a recession, a surge in unemployme­nt, sharply rising interest rates and collapse in property prices and stock markets.

The FPC said it was also likely to raise the counter-cyclical capital buffer later this autumn to strengthen banks’ capital ratios.

“Absent a material change in the outlook, the FPC expects to increase the rate to 1 per cent at its November meeting, with binding effect a year after that.” Clear Mortgage Solutions (CMS), which trades under the Mortgage Advice Bureau (MAB) network, has opened a new office in Glasgow. While other members of the MAB network have a presence in the city, it is the first office outside of Edinburgh for CMS. Led by Emma Buchanan (pictured with Dominic Taddei, who founded the Clear Mortgage Solutions business in 2006), the new operation promises to offer a “more local service for customers on the west coast”.

 ??  ??

Newspapers in English

Newspapers from United Kingdom