Bank of England to rein in risky lending

The Bank of England (BoE) has urged banks to consider the risk of future spikes in interest rates when approving mortgages and is preparing to rein in dangerous lending.

According to Reuters, British house prices have risen by around 10 per cent over the past year and the central bank said mortgages represented a higher share of homebuyers' income than at any point since 2005.

Some commentators argue that parts of Britain's housing market are already in a bubble and the BoE's Financial Policy Committee (FPC), which monitors risks to the financial system, said it was keeping a close eye on the sector.

"Given the increasing momentum, the FPC will remain vigilant to emerging vulnerabilities, will continue to monitor conditions closely and will take further proportionate and graduated actions if warranted," the Bank said.

From next month the Financial Conduct Authority – Britain’s answer to the Australian Prudential Regulation Authority (APRA) – will introduce tougher home loan underwriting standards.

The BoE said in a report of a quarterly meeting of its risk watchdog, the Financial Policy Committee, that from June it hoped to have the power to set the interest rate scenarios that lenders would have to consider when granting loans.

The central bank also said that when it conducts its part of European Union-wide stress tests for banks this year, it would also make them consider the risk of a sharp rise in interest rates and a big fall in house prices.

The BoE added that British banks' financial health had improved since its last report in November 2013, but that uncertainty about the cost of past misconduct had increased.

Banks like Barclays and Royal Bank of Scotland (RBS) have been fined millions of pounds for rigging the London Interbank Offered Rate, or Libor, an interest rate benchmark.

Lenders are also paying huge sums in compensation for misselling loan insurance, and allegations are emerging that banks have manipulated the foreign exchange market.

Separately, the Bank published its terms of reference for an assessment of leverage ratios at banks, which it said would report back in November 2014.

However, it will not set a numerical value for a leverage ratio until later.

The FPC is likely to get power in future to raise leverage ratios at British banks to above international minimum levels.

Under the global accord known as Basel III, banks across the world must hold capital equivalent to at least three per cent of their total assets on a non-risk-weighted basis from the start of 2018.

The aim of this so-called leverage ratio is to serve as a backstop to a bank's core capital buffer, which is based on risk-weighted assets.
Policymakers in Britain, Switzerland and the United States have put more emphasis on the leverage ratio, saying banks can too easily game risk weightings in their core buffers and that a higher ratio is required.

Analysts expect them to set higher levels than Basel III.

"We expect the UK regulator will eventually settle on a 4 to 4.5 per cent hurdle rate, to be achieved by the end of 2017. Barclays looks most at risk," Citi bank said in a research note.

The FPC also said it was minded to require big banks to add up risks on their books using the same standardised model as smaller lenders.
Policymakers have become sceptical about how large lenders use in-house computer models to tot up risks, a calculation which determines how much capital they must hold.

The FPC said banks who use in-house models may have to report figures under the standardised approach as well as following a review due in the first half of next year.

"On a standardised basis we estimate Lloyds would see the greatest risk-weighted assets inflation," Citi bank said.

Finally, the watchdog said it will set out "concrete and specific action plans" for banks this year to improve their resilience to cyberattacks.

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