BoE raises lenders' capital requirements due to "pockets of risk"

UK banks will have to raise an extra £11.4bn in capital requirements over the next 18 months after the Bank of England's Financial Policy Committee increased the countercyclical capital buffer rate to 0.5% with a further rise to 1% expected in November.

Related topics:  Finance News
Rozi Jones
27th June 2017
bank of england boe

The capital requirements aim to make financial institutions more resilient to economic risks.

The FPC says current risks are at a standard level but warned of "pockets of risk that warrant vigilance" including a rapid increase in consumer credit and lending conditions in the mortgage market.

Due to the increase in consumer credit, the Bank announced that it would be bringing forward the assessment of stressed losses on consumer credit lending in its 2017 annual stress test from November to September. This, it says, will help inform its assessment of any "additional resilience required against this lending".

The Bank of England believes lending conditions in the mortgage market are becoming easier and that as a result, lenders may be placing "undue weight on the recent performance of loans in benign conditions".

It therefore plans to 'clarify its existing insurance measures in the mortgage market', designed to prevent excessive growth in the number of highly indebted households.

The FPC's Financial Stability Report also outlined 'possible financial stability implications' of the United Kingdom’s withdrawal from the European Union. It believes the scenario that would have the most impact on stability is one in which there is "no agreement in place at the point of exit".

Citing direct effects of Brexit on financial services, the Bank raised concerns about the amount of legal and regulatory framework derived from EU law and the right of financial companies within the EEA to provide services across borders.

The Financial Stability Report said the EEA agreement promotes "substantial cross-border provision of a wide range of financial services", noting that around £40bn of UK financial services revenues relate to EU clients and markets.

It warned that there is "no generally applicable institutional framework for cross-border provision of financial services outside the European Union" and raised concerns that UK firms would no longer be able to provide services to EEA clients (and vice versa) in the same way, "or in some cases not at all".

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