BOE Orders Banks To Boost Capital Buffers By £11.4B

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Bank of England deputy governor Jon Cunliffe said today that policymakers have to wait and see how the United Kingdom economic slowdown plays out before deciding whether to raise interest rates.

Additionally, next month regulators are to publish new guidelines for consumer lending to ensure risks are priced and managed appropriately.

But he said the Bank must consider how much of the inflation overshoot was down to domestic pressures rather than the impact of the Brexit-hit pound. Regarding Brexit, "there are risks around that process, so contingency planning needs to be not only put in place but also activated".

It said the biggest risk was the rapid growth of consumer lending, with auto finance having rocketed by around 15% and credit card borrowing by nearly 10%. Capital buffers are necessary to allow banks to support the real economy in a downturn.

After the United Kingdom made a decision to leave the European Union a year ago, the FPC cut to zero the requirement that banks create an extra capital buffer. It has now lifted the ratio back up to 0.5 percent, and scheduled a similar increase for November.

Cunliffe is the latest Bank's Monetary Policy Committee member to publicly express views about rates policy after three members out of eight unexpectedly voted to raise the base rate from 0.25 per cent to 0.5 per cent at June's meeting.

However, since then the economy has performed more strongly than the Bank predicted, with it now judging it can raise capital requirements ahead of the next shock. The increase from 3 percent is meant to restore the "level of resilience" delivered before the FPC decision to exclude central-bank reserves from the measure, according to the report.

This sees it scrap an emergency policy brought in past year after the Brexit vote, when the buffer rate was slashed to zero, allowing banks to release reserves to help ward off the threat of recession.

Bank of England Governor Mark Carney said lenders are now more vulnerable to risks from the rapid rise in consumer credit, amid fears of a replay of the 2007 financial crisis.

The Bank of England has closed its net on mortgage lenders trying to bend the rules laid out to stress test the affordability of mortgage borrowers. "Whether through an increase in long-term interest rates, adjustments to growth expectations or both", Carney says.

Existing restrictions on high loan-to-income mortgage lending were likely to stay for the long term, the BoE said, and it also tweaked the rate against which lenders must test borrowers' ability to repay their mortgages.

"Some possible global risks have not crystallised, though financial vulnerabilities in China remain pronounced", the FPC said.

"If asset management were to fragment between the United Kingdom and Europe, material economies of scale and scope that are now achieved by pooling of funds and their management would be reduced".

Even with Haldane's surprise intervention last week, most economists think interest rates are unlikely to rise in the next few months.

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