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Bank of England to impose new capital buffers due to consumer credit risk

By Oliver Haill

Date: Monday 25 Sep 2017

Bank of England to impose new capital buffers due to consumer credit risk

(ShareCast News) - The Bank of England will call for several billion of new regulatory capital buffers for lenders after it warned that risks from rising debt are building in UK and overseas based on overconfidence that recent benign conditions will continue in the future.
On domestic credit, the Bank's Financial Policy Committee has told high street banks that the UK countercyclical capital buffer rate will be maintained at 0.5% but is likely to be increased to 1% in November as there is felt to be a low level of domestic risk, with only 1% of households facing potential mortgage repayment difficulties.

However, the FPC said there was a "pocket of risk" in consumer credit, which while not a material risk to overall UK economic growth, is a risk to banks' ability to withstand severe economic downturns as the asset class is disproportionately more likely to default.

"Although the overall credit quality of consumer credit has improved significantly since the financial crisis, the FPC judges that lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality. As a result, they have been underestimating the losses they could incur in a downturn," the committee said in a report on Monday.

In the event of a downturn, UK banks would incur UK consumer credit losses of around £30bn, or 20% of UK consumer credit loans, the FPC and Prudential Regulation Committee calculated.

Detailed results of this stress test scenario will be published for each bank on 28 November, though banking analysts highlighted Barclays and Lloyds as having the largest exposure to consumer credit compared to the other five banks being tested HSBC, RBS, Nationwide, Santander UK and Standard Chartered.

"Regulatory capital buffers for individual firms will be set following the full stress test results so that each bank can absorb its losses on consumer lending, alongside all the other effects of the stress scenario on its balance sheet," the FPC said, adding that it also expects banks "will begin to factor these market-wide levels of stressed losses on consumer credit into their overall lending and capital plans".

The BoE also highlighted other global risks, including that financial vulnerabilities in China are "pronounced"; that US corporate leverage has risen to new highs; that global corporate bond spreads have narrowed to "unusually low levels"; and that some asset prices "appear vulnerable to a repricing" through increases in long-term interest rates and/or adjustment of growth expectations.

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