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Stress tests: Bank of England flags up buy-to-let concerns Stress tests: Bank of England flags up buy-to-let concerns
(about 5 hours later)
The Bank of England said it is ready to take action to cool the buy-to-let housing market as it put UK banks on notice that they could be forced to hold up to £10bn of capital in anticipation of an economic downturn.The Bank of England said it is ready to take action to cool the buy-to-let housing market as it put UK banks on notice that they could be forced to hold up to £10bn of capital in anticipation of an economic downturn.
Announcing the results of its “stress tests” designed to measure how banks would cope with another financial crisis, Threadneedle Street said Standard Chartered and Royal Bank of Scotland had the weakest financial positions.Announcing the results of its “stress tests” designed to measure how banks would cope with another financial crisis, Threadneedle Street said Standard Chartered and Royal Bank of Scotland had the weakest financial positions.
Related: UK banks pass stress tests, but RBS and Standard Chartered are weakest - live updatesRelated: UK banks pass stress tests, but RBS and Standard Chartered are weakest - live updates
Both would have been unable to withstand shocks to the financial system had they not already taken action to bolster their financial position during 2015. In a shift in policy, the Bank said that the banking system had moved out of the post-crisis phase and that it was “actively considering” whether banks should start to use a less risky backdrop to prepare for turbulence in the future by amassing capital in a move that could push up lending rates without a rise in the Bank’s 0.5% interest rate.
In a shift in policy, the Bank said that the banking system had moved out of the post-crisis phase and that it was “actively considering” whether banks should start to use a more benign economic environment to prepare for turbulence in the future and tame banks’ lending appetite.
It is the first signal from the Bank that it could use these new so-called countercyclical capital buffers – a response to the 2008 banking crisis when banks ran down their capital ahead of the economic downturn - for the first time.It is the first signal from the Bank that it could use these new so-called countercyclical capital buffers – a response to the 2008 banking crisis when banks ran down their capital ahead of the economic downturn - for the first time.
Bank of England governor Mark Carney said: “In the process of increasing capital requirements there will be cost passed on to borrowers that will have an impact on demand and some impact on inflation”. But, the Bank played down the impact as knocking 0.1 percentage points ogg GDP over three years and increasing the cost of bank funding for loans by 0.05 percentage points.
The Bank has been warning for many months that it is concerned about the buy-to-let mortgage market. While it did not take immediate action to cool this sector - where lending has risen 10% in the first nine months of the year - it said it was reviewing the lending criteria adopted by firms and stands “ready to take action.”The Bank has been warning for many months that it is concerned about the buy-to-let mortgage market. While it did not take immediate action to cool this sector - where lending has risen 10% in the first nine months of the year - it said it was reviewing the lending criteria adopted by firms and stands “ready to take action.”
It will also be watching the impact of the extra 3% stamp duty announced last week by George Osborne in his autumn statement.It will also be watching the impact of the extra 3% stamp duty announced last week by George Osborne in his autumn statement.
“Following the global financial crisis there was a period of heightened risk aversion and retrenchment from risk-taking as financial institutions, businesses and households sought to repair their balance sheets,” the Bank said as it published its half-yearly assessment of risks to the financial system. It said it “judges that the system has now moved out of that period”. The Bank will announce in March whether it intends to put “countercyclical buffers” in place and each bank’s current capital will be assessed between now and then. “The result of this process will mean an increase in the countercyclical buffer that will probably not change the overall capital requirements for individual banks,” the Bank said.
“Household debt has fallen relative to income, but is still elevated, banks are more resilient and credit is generally more available,” it said. Bank shares rose as Carney said that the banks “are already most of the way there” in reaching total capital targets by a 2019 deadline, scotching lenders’ concerns that policymakers would keep increasing their demands for capital - which is now ten times greater than before the crisis.
The Bank will announce in March whether it intends to put “countercyclical buffers” in place in a move that could require the banking industry to hold £10bn of capital against its UK lending. Some banks may need to raise fresh capital, others may be able to rejig their finances to meet any extra requirements.
Each bank’s current capital will be assessed between now and then. “The result of this process will mean an increase in the countercyclical buffer that will probably not change the overall capital requirements for individual banks,” the Bank said.
The half-yearly assessment of risks to the system – which warned that the global macro economic environment was “challenging” - was published alongside heath checks on seven major lenders. It showed that bailed-out RBS and Standard Chartered would have needed more capital had they not already taken action to bolster their financial strength.The half-yearly assessment of risks to the system – which warned that the global macro economic environment was “challenging” - was published alongside heath checks on seven major lenders. It showed that bailed-out RBS and Standard Chartered would have needed more capital had they not already taken action to bolster their financial strength.
But the Bank said it was not concerned about the strength of the banking system, seven years on from the crisis that required a £65bn bailed out two major lenders. “The stress-test results suggest that the banking system is capitalised to support the real economy in a severe global stress scenario, which adversely affects the United Kingdom,” it said. But the Bank said it was not concerned about the strength of the banking system, seven years on from the crisis that required a £65bn bailed out two major lenders. “The global environment is unforgiving and the legacy of the crisis means private and public balance sheets remain stretched. This calls for resilience not fatalism. Today we have reaffirmed the strength of our banks in the face of these risks,” Carney said.
The Bank subjected seven major lenders to a hypothetical scenario that involved a dramatic slowdown in the Chinese economy, prolonged deflation, a reduction in interest rates to zero and a huge increase in costs for fines and legal bills of £40bn. The test found that profits would fall more than than they had done during the 2008 banking crisis – by £100bn by the low point of the hypothetical scenario in 2016 - but capital cushions remained strong enough to withstand the downturn while increasing credit to the economy by 10%.The Bank subjected seven major lenders to a hypothetical scenario that involved a dramatic slowdown in the Chinese economy, prolonged deflation, a reduction in interest rates to zero and a huge increase in costs for fines and legal bills of £40bn. The test found that profits would fall more than than they had done during the 2008 banking crisis – by £100bn by the low point of the hypothetical scenario in 2016 - but capital cushions remained strong enough to withstand the downturn while increasing credit to the economy by 10%.
The other lenders tested in the second annual assessment of financial health were HSBC, Barclays, Nationwide, Santander UK and bailed-out Lloyds Banking Group.The other lenders tested in the second annual assessment of financial health were HSBC, Barclays, Nationwide, Santander UK and bailed-out Lloyds Banking Group.
While RBS and Standard Chartered both passed the overall thresholds set by the Bank, they did not meet the policymakers’ judgement-based assessment of their capital strength. But neither were forced to change their plans as they had already taken steps to improve their financial position: RBS by selling businesses including Citizens in the US and Standard Chartered by embarking on a £3.3bn cash call.While RBS and Standard Chartered both passed the overall thresholds set by the Bank, they did not meet the policymakers’ judgement-based assessment of their capital strength. But neither were forced to change their plans as they had already taken steps to improve their financial position: RBS by selling businesses including Citizens in the US and Standard Chartered by embarking on a £3.3bn cash call.
The Bank of England warned that cost of paying fines and legal fees was hard to assess and that banks had already incurred a £30bn bill between 2009 and 2014. John Thanassoulis, professor of finance economics at Warwick Business School, said: “What the latest stress tests show is that we are out of the financial crisis – as all of the banks have passed – although two came close to not passing the test: Standard Chartered and Royal Bank of Scotland”.
But, he said, the use of the counter cyclical buffer could “be in effect tightening monetary policy, which is not good for the UK with inflation so subdued”.