This morning at 10.30, the Bank of England will publish its twice-yearly report on UK financial stability. Mark Carney, the bank’s governor, will present the report alongside any recommendations from last week’s Financial Policy Committee meeting.
Questions of whether the bank should withdraw its emergency support for banks and clamp down on excess consumer credit are likely to be central features. Here are the main things to look out for:
1. Removing emergency support for banks After the UK voted for Brexit last June, the FPC worried about the resilience of lending and borrowing and introduced measures it hoped would enable banks to offer up to £150bn of loans to households and companies. The BoE chose to do this by reducing the amount of capital banks had to hold against bad times, allowing them to drop their “counter-cyclical capital buffers” from 0.5 per cent of assets to zero. It said this emergency rate would stay in place until at least June 2017 and, in March, the FPC said it would make a “full assessment” of whether to raise the buffer to “a more neutral level”. With no shortage of credit, the FPC is poised to increase the buffer, but any change will not be immediate. The FPC normally gives banks a year’s notice of any increase. The FPC is also likely to tighten the calculation of the liquidity ratio, again reversing action taken immediately after the referendum, ensuring that banks hold more liquid assets as capital in future.
2. Concerns about consumer borrowing The BoE has said it is increasingly worried about the growth of consumer credit — car loans, personal loans and credit card debt — which has been rising at annual rates well above 10 per cent. Although consumer debt is much smaller than mortgage debt, the BoE worries that the default rates are likely to be much higher, especially in a world of unsustainably fast consumer credit growth. It has already ordered a review of banks’ underwriting standards in consumer credit, particularly the interest-free periods in credit card lending. This meeting is the FPC’s opportunity to damp consumer credit growth. Options include restrictions on low initial “teaser” interest rates on credit cards.
3. Whether car finance is a worry Britain has taken to buying new and used cars on credit through “personal contract payment” deals that spread the risk of the loss of a car’s value between the consumer and the finance provider. But as a glut of new cars sold in the past few years lowers the price of used vehicles, the BoE is worried that troubles in the market could multiply, hurting both finance providers and consumers. Carmakers have also been hit by the fall in the value of the pound, which has raised import prices. The financial stability report will assess the risks in the car finance market — and whether risks to the stability of the wider financial system have risen as the popularity of car loans has increased.
4. Safe as houses The report always assesses risks in the mortgage market, because it is by some margin the most important destination for lending in Britain. The FPC has already limited lenders’ ability to offer high loan to income mortgages and it will report on whether loan books have retained the resilience of the past. Residential and commercial mortgage lending growth has been contained in recent months, so the focus is likely to be directed more at the affordability of lending and whether the growing pessimism in the housing market with recent falls in house prices might lead to financial stability risks in the banking sector. The FPC is unlikely to take further action in this area at this meeting.
5. A wary eye on Brexit The BoE prides itself on the relatively smooth operation of financial markets following the EU referendum last year, after which it took emergency action to quell initial panic. The return of calm after last summer’s vote has allowed the BoE to drop its warning that Brexit posed the greatest domestic risk to financial stability. But that does not stop the bank from worrying that the Brexit negotiations might lead to a sudden loss of confidence in UK assets, leaving Britain vulnerable because it is dependent, as Mr Carney put it, on the “kindness of strangers”. No action is likely, but expect the BoE to highlight its vigilance about the continued risk.