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Bank of England tells banks to raise more capital as consumer credit fears grow - business live Bank of England tells banks to raise more capital as consumer credit fears grow - business live
(35 minutes later)
1.16pm BST
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Bank of England: The key points
That wasn’t the most illuminating press conference with Mark Carney, but here’s what we learned.
The Bank of England is pushing the UK financial sector to prepare for a downturn, by making them hold an extra £11bn of capital. But.... Carney says this won’t be a problem, as banks already hold more capital than required, since the rule were relaxed after the Brexit vote.
As Carney puts it:
We want to move the levels of capital back up to the level they should be -- any time you move into more benign credit conditions there have been fewer defaults.
The BoE is concerned that some lenders are becoming too reckless, saying that:
“Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. Lenders may be placing undue weight on the recent performance of loans in benign conditions.”
Carney warns banks to "learn lessons of past" - what happens if underwriting standards on consumer lending weaken. Some evidence they are
The Bank’s key target appears to be complacency, as it scrambles to bring its consumer credit stress tests forward by three months to September.
It is particularly interested in the car market, following the boom in “Personal Contract Purchase” deals. These allow customers to pay a monthly fee for a new car, and then either pay a hefty ‘balloon payment’ to actually own it, or switch to a new deal with a new vehicle. The fear is that customers could be left high and dry if financial conditions tighten.
Carney: much of UK pick up in debt related to car loans
However (and this is where the confusion starts) the Bank doesn’t want consumers to cut up their credit cards and stop trying to shimmy up the housing ladder. Instead, it wants them to be sensible when borrowing, and trust that the Bank is keeping the financial system strong.
Those families who are most over-extended, and wouldn’t cope with higher borrowing costs, are a concern, though:
Mark Carney says that that the Bank is concerned about highly indebted households and how they will fare if economic circumstances change.
On Brexit, Carney repeatedly said the Bank’s contingency planning is focusing on the most disruptive scenario, in which Britain crashes out of the EU without a deal. But that doesn’t mean the BoE expects such a cliff-edge exit.....
BoE’s Carney: Brexit Contingency Plans Unchanged On UK Election Results
12.35pm BST12.35pm BST
12:3512:35
If you’re just tuning in, here’s Jill Treanor’s story about the Bank of England’s financial stability report:If you’re just tuning in, here’s Jill Treanor’s story about the Bank of England’s financial stability report:
12.24pm BST12.24pm BST
12:2412:24
Final question:Final question:
Q: You say you expect to raise the counter-cyclical buffer to 1% in November, but could Brexit force a cut back from 0.5% to 0% (reversing today’s move)Q: You say you expect to raise the counter-cyclical buffer to 1% in November, but could Brexit force a cut back from 0.5% to 0% (reversing today’s move)
Mark Carney says the BoE thinks the buffer should be around 1% in stable times. The BoE had started the process of raising the buffer last year, before the Brexit vote, which led it to be cut back to 0% to take worries about lending ‘off the table’.Mark Carney says the BoE thinks the buffer should be around 1% in stable times. The BoE had started the process of raising the buffer last year, before the Brexit vote, which led it to be cut back to 0% to take worries about lending ‘off the table’.
So.... we could have decided to hike the buffer to 1% today, but it was more sensible to allow a ‘gradual build’ (to 0.5% today, and 1% in November)So.... we could have decided to hike the buffer to 1% today, but it was more sensible to allow a ‘gradual build’ (to 0.5% today, and 1% in November)
On Brexit, we want the system to be as resilient as possible to prepare for any outcome in 640 days time, he concludes.On Brexit, we want the system to be as resilient as possible to prepare for any outcome in 640 days time, he concludes.
I think that means the BoE want the banking sector to be well capitalised, in case of any Brexit shock in March 2019, when Britain leaves the EU.I think that means the BoE want the banking sector to be well capitalised, in case of any Brexit shock in March 2019, when Britain leaves the EU.
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Q: You say that West End asset prices are ‘unsustainable’; when might they return to reality, and what impact would that happen?Q: You say that West End asset prices are ‘unsustainable’; when might they return to reality, and what impact would that happen?
Carney reiterates his earlier point that Britain currently have “Very low risk-free rates, and high valuation levels”. So either those rates should rise, or asset prices should fall.Carney reiterates his earlier point that Britain currently have “Very low risk-free rates, and high valuation levels”. So either those rates should rise, or asset prices should fall.
It would be foolish to put a timescale on it - prices can stay unsustainable for a long time, and then correct quickly, he warns.It would be foolish to put a timescale on it - prices can stay unsustainable for a long time, and then correct quickly, he warns.
12.15pm BST12.15pm BST
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Carney: We've had very productive discussions with US regulatorsCarney: We've had very productive discussions with US regulators
Q: The report talks about the need for ‘consistent implementation’ of international standards; are you particularly worried about the Trump administration?Q: The report talks about the need for ‘consistent implementation’ of international standards; are you particularly worried about the Trump administration?
Carney says it is important to have open global standards, and even more important that they are implemented, to avoid another financial crisis.Carney says it is important to have open global standards, and even more important that they are implemented, to avoid another financial crisis.
You also need supervisory co-operation between regulators...and we want to reinforce that where possible.You also need supervisory co-operation between regulators...and we want to reinforce that where possible.
On the US, we have had “very productive discussions” with regulators about it.On the US, we have had “very productive discussions” with regulators about it.
Carney explains how many countries have some unique rules (such as America’s Volcker rule, or bank ring-fencing in the UK), which they can change without affecting other nations. But there needs to be more co-ordination when it comes to global standards, if there are areas of ‘inconsistency’ that need to be addressed.Carney explains how many countries have some unique rules (such as America’s Volcker rule, or bank ring-fencing in the UK), which they can change without affecting other nations. But there needs to be more co-ordination when it comes to global standards, if there are areas of ‘inconsistency’ that need to be addressed.
[Explainer: Donald Trump has vowed to cut regulations in the financial sector, such as the Volcker rule which is meant to prevent banks taking dangerous trading risks.[Explainer: Donald Trump has vowed to cut regulations in the financial sector, such as the Volcker rule which is meant to prevent banks taking dangerous trading risks.
Trump is also keen to repeal Dodd-Frank, which was brought in after the financial crisis. ]Trump is also keen to repeal Dodd-Frank, which was brought in after the financial crisis. ]
12.02pm BST12.02pm BST
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Q: You point out that commercial real estate assets are overvalued, and could unwind if people try to sell them in a rush. That happened after the Brexit vote - has anything changed since?Q: You point out that commercial real estate assets are overvalued, and could unwind if people try to sell them in a rush. That happened after the Brexit vote - has anything changed since?
[explainer: several property funds froze redemptions after the EU referendum, to stop investors cashing out, exposing the dangers of investing in ‘illiquid assets’ such as shopping centres][explainer: several property funds froze redemptions after the EU referendum, to stop investors cashing out, exposing the dangers of investing in ‘illiquid assets’ such as shopping centres]
Carney says there is a disconnect between the market expectations for future growth, and the value of commercial buildings.Carney says there is a disconnect between the market expectations for future growth, and the value of commercial buildings.
So either those expectations will rise, or commercial asset values will fall.So either those expectations will rise, or commercial asset values will fall.
Carney offering coded warning on the value of commercial real estate. Disconnect between growth expectations and asset values.Carney offering coded warning on the value of commercial real estate. Disconnect between growth expectations and asset values.
11.55am BST11.55am BST
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Q: Isn’t the boom in consumer credit due to you keeping interest rates so low?Q: Isn’t the boom in consumer credit due to you keeping interest rates so low?
Carney insists he’s not to blame, and points to the broader context of a UK economy that has grown solidly over the last 12 months (despite slowing in the first quarter of 2017).Carney insists he’s not to blame, and points to the broader context of a UK economy that has grown solidly over the last 12 months (despite slowing in the first quarter of 2017).
Here’s a chart showing how consumer debt has grown:Here’s a chart showing how consumer debt has grown:
Consumer credit growing much faster than household incomes @bankofengland #Carney #FinancialStabilityReport pic.twitter.com/9wg6T9ueNSConsumer credit growing much faster than household incomes @bankofengland #Carney #FinancialStabilityReport pic.twitter.com/9wg6T9ueNS
11.52am BST11.52am BST
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Carney says the boom in car loans is a major factor behind the pick-up in consumer debt recently, but he remains “sanguine” about the banking sector’s overall exposure to it.Carney says the boom in car loans is a major factor behind the pick-up in consumer debt recently, but he remains “sanguine” about the banking sector’s overall exposure to it.
Carney: much of UK pick up in debt related to car loansCarney: much of UK pick up in debt related to car loans
11.49am BST11.49am BST
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BoE: Now's the time to check consumer creditBoE: Now's the time to check consumer credit
Q: Your charts show that consumer finance has been growing faster than household income since 2014, so shouldn’t you have issued today’s warning sooner?Q: Your charts show that consumer finance has been growing faster than household income since 2014, so shouldn’t you have issued today’s warning sooner?
Deputy governor Sir John Cunliffe says consumer borrowing actually picked up in 2013, but overall household lending actually grew slower than the UK economy.Deputy governor Sir John Cunliffe says consumer borrowing actually picked up in 2013, but overall household lending actually grew slower than the UK economy.
Consumer borrowing is £200bn, compared to £1.4 trillion in mortgage lending, he explains - so the BoE has to decide when it’s a serious worry.Consumer borrowing is £200bn, compared to £1.4 trillion in mortgage lending, he explains - so the BoE has to decide when it’s a serious worry.
We’ve been watching consumer credit for a while, and now is the time to look at whether underwriting standards are starting to slip, and bring forwards our stress test (by three months, to September)We’ve been watching consumer credit for a while, and now is the time to look at whether underwriting standards are starting to slip, and bring forwards our stress test (by three months, to September)
11.45am BST11.45am BST
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Q: Are banks misbehaving and gaming the system, and is there a cultural problem?Q: Are banks misbehaving and gaming the system, and is there a cultural problem?
They’re not gaming the system, but they’re not learning the lessons of the past, Carney says.They’re not gaming the system, but they’re not learning the lessons of the past, Carney says.
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11.44am BST11.44am BST
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Q: Which consumer borrowing are you most worried about?Q: Which consumer borrowing are you most worried about?
Carney cites the sharp build up in car financing – both in volume, and the move towards ‘personal contract purchasing’ deals (where buyers pay monthly repayments, and then face a large balloon payment to actually own their car)Carney cites the sharp build up in car financing – both in volume, and the move towards ‘personal contract purchasing’ deals (where buyers pay monthly repayments, and then face a large balloon payment to actually own their car)
Q: How confident are you that banks can raise the extra capital you are demanding?Q: How confident are you that banks can raise the extra capital you are demanding?
They all have this capital on their books at present, Carney replies. It’s a question of reallocating capital from other areas (and perhaps choosing to raise more capital)They all have this capital on their books at present, Carney replies. It’s a question of reallocating capital from other areas (and perhaps choosing to raise more capital)
The extra capital buffer will mean UK banks must meet a 4% leverage ratio, Carney explains, but the current leverage ratio is actually 5.25%.The extra capital buffer will mean UK banks must meet a 4% leverage ratio, Carney explains, but the current leverage ratio is actually 5.25%.
In other words, Banks shouldn’t face a massive challenge meeting the BoE’s demands.In other words, Banks shouldn’t face a massive challenge meeting the BoE’s demands.
Carney: at most including extra capital buffer demanded takes demands on UK banks to 4% leverage ratio. Less than current. (ie did nothing!)Carney: at most including extra capital buffer demanded takes demands on UK banks to 4% leverage ratio. Less than current. (ie did nothing!)
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at 11.54am BSTat 11.54am BST