Bank puts its foot down over mortgage lending rules

Posted June 28, 2017

The Bank of England has ordered lenders to collectively raise £11.4billion to cover the risk of bad loans.

The BoE is increasing what is called the countercyclical capital buffer rate from zero percent to 0.5 percent, the BoE's Financial Policy Committee (FPC) watchdog said in its bi-annual report issued on Tuesday.

The bank announced that it would increase the counter-cyclical capital buffer to 0.5% from 0.0% and expects to increase the buffer further to 1.0% at its November meeting.

The lenders have to scrutinise the borrowers to ensure they could still afford their repayments if the Bank of England raised its official base rate by three percentage points.

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Deutsche Bank

The Bank's economists will also be busy testing the effects on financial stability of Brexit, with a "no deal" scenario among the most important. Among the requirements in that report: United Kingdom banks must increase their capital buffers to protect themselves against myriad risks, including Brexit and an overall increase in consumer borrowing.

Banks and building societies are now allowed to lend a maximum of 15% of their mortgages to homebuyers who take especially large loans of four and a half times their income.

The FPC has insisted that lenders must test whether borrowers...

The Bank's Financial Policy Committee (FPC) suggested lenders had become complacent about their lending.

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The move follows months of concern about unsecured consumer borrowing in the United Kingdom, which is now growing at an annual rate in excess of 10% as consumers turn to debt to support their spending amid meager wage growth and higher inflation.

Donald Trump has vowed to cut regulations in the financial sector, such as the Volcker rule which is meant to prevent banks taking risky trading risks.

Consumer credit has grown much faster than household incomes, leading to fears that some people have taken out borrowing they simply can not afford.

The Bank said measures outlined in the report aim to boost the resilience of the financial sector to the "wide range of risks it faces".

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"Lending conditions in the mortgage market are becoming easier and lenders may be placing undue weight on the recent performance of loans in benign conditions". Some of the central banks' interest rate setters now think it is time to raise its main interest rate.

On Brexit, the BOE said it is overseeing banks' contingency planning for withdrawal and listed ways in which a disorderly British exit from the bloc could hurt the United Kingdom and European economies.

"In addition the inconsistency between the valuation of some assets, such as commercial real estate and corporate bonds, and the risks implied by very low long-term interest rates make those assets vulnerable to a re-pricing whether through an increase in long-term interest rates, adjustments to growth expectations, or both".

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