Bank of England says lenders vulnerable ‘if things go wrong’
THE impact on the financial services sector in the first phase of Brexit negotiations will be relatively modest but not trivial, believes head of the Bank of England’s regulatory watchdog Sam Woods.
On a visit to Cardiff, Mr Woods, the chief executive of the Prudential Regulation Authority (PRA), said while there was no “smoking gun” or “big drop off” in underwriting standards, lenders were less resilient to absorb losses if things go wrong than previously – against a backdrop of consumer credit growing at more than 10% per annum.
Mr Woods is responsible for the supervision of all banks and insurance companies in the UK.
The BOE has asked financial institutions to submit contingency plans for the impact of Brexit, including for a worse case scenario, hard exit. The information will be submitted later this month.
Mr Woods said: “We and those firms that are affected are deep in contingency planning and that is all about preparing for a range of scenarios. We are hoping for the best outcome, including the delivery by the Government of its plan to secure a deep and lasting trading agrement with the EU 27. We think that is a good objective and we support it and we hope it comes about. But we don’t want firms to assume quite early in negotiation that it will be achieved.
“So therefore we have asked all firms to plan and give us what their contingency plans would be if the outcome was a harder one in which trade was disrupted in some way.”
He said once that information was in, the BoE would be in a better position to gauge the bigger picture, However, he added: “What I would say to you is that it is sensible for firms to do that contingency planning. And I would say the effect on jobs, and those sort of things, in the first phase of this will be relatively modest, but not trivial... but a huge amount depends on where the negotiation gets to, as to where this [impact on the sector] gets to in the long term.”
Last week the PRA fired a warning shot around the bows of lenders over levels of consumer lending, stressing the need to be responsible.
Mr Woods said: “In relation to consumer credit we are worried about the level of growth, by which I mean credit cards, car finance and personal loans. And why is that? Because it been growing at 10.3% over the last year and indeed for some period before that. That is concerning because it is four times faster [than] the rate of household incomes are going up. So obviously it cannot go on forever.”
He said the PRA’s latest analysis found two major things.
He said: “One is that the lending is less resilient, by which I mean there is less capital and income to absorb losses if things go wrong than there was before.
“And the second is that we have identified a number of weaknesses in how firms are going about that sort of lending.
“Our line of work is quite complicated, but it pays to do the simple things sometimes and with something that is growing quite fast [consumer credit] there is going to be risks associated with that, so let’s make sure we intervene before the thing ends up being a major problem.”
He said that in any recession it was highly indebted households that cut back their debt much more than houses that don’t.
And while small in comparison to the mortgage lending market, the impact from losses in his area of regulation are relatively far greater for financial institutions.
Mr Woods added: ”This type of lending is much smaller than mortgage lending and is one seventh the size, but over the last 10 years banks have lost 10 times more on this stuff than they have lost on mortgages.
“It is a very different type of business, but a couple of things illustrate why we should now be worried. One is that you can now get a zero % interest credit card for nearly four years and I think that should be something we scratch our head about.
“The other is that 85% of new cars are financed with car finance. So the way that we are buying cars is changing pretty fast and for almost all those deals people can simply hand back the keys.”
Addressing what consumers need to think about when borrowing, he added: “They need think about what will happen if interest rates went up and the most important bit of that for those taking out a mortgage, because they are still the vast majority of consumer debt, would they still able to afford it if the interest rate on that mortgage went up?
“And we have introduced a regulation, that we have forced the banks to comply with, which is to say if the rate went up by 3%, could this borrower still afford it? And this last week or so we have just tightened up that definition a bit.”