The Bank of England publishes its Financial Stability report twice a year via the Financial Policy Committee (FPC), which has assessed the overall risk from the domestic environment to be at a standard level in June 2017
The Executive Summary reads:
As is often the case in a standard environment, there are pockets of risk that warrant vigilance. 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. Exit negotiations between the United Kingdom and the European Union have begun. There are a range of possible outcomes for, and paths to, the United Kingdom’s withdrawal from the EU. Some possible global risks have not crystallised, though financial vulnerabilities in China remain pronounced. Measures of market volatility and the valuation of some assets — such as corporate bonds and UK commercial real estate — do not appear to reflect fully the downside risks that are implied by very low long-term interest rates.
To ensure that the financial system has the resilience it needs, the FPC is:
- Increasing the UK countercyclical capital buffer rate to 0.5%, from 0%
- Bringing forward the assessment of stressed losses on consumer credit lending in the Bank’s 2017 annual stress
test - Clarifying its existing insurance measures in the mortgage market, designed to prevent excessive growth in the number of highly indebted households
- Consistent with its previous commitment, restoring the level of resilience delivered by its leverage ratio standard to the level it delivered in July 2016 before the FPC excluded central bank reserves from the leverage ratio exposure measure
- Overseeing contingency planning to mitigate risks to financial stability as the United Kingdom withdraws from the European Union
- Building on the programme of cyber resilience testing it instigated in 2013, by setting out the essential elements of the regulatory framework for maintaining cyber resilience
MALG member StepChange’s CEO Mike O’Connor, said:
“The Bank is right to address the rapid growth of consumer credit but there may be consequences, including potential increases in the cost of borrowing. While the Bank’s focus is on broader economic stability, there needs to be greater consideration of the stability of the ordinary family’s household finances, especially the 8.8m people using credit for essential household bills1. Any increase in borrowing costs could tip households, many of which are already on a financial knife-edge, into serious financial hardship. The Government, regulators and banks, must collectively do more to support people who are struggling to manage their way out of debt in an affordable and sustainable way.
“Both the Labour and Conservative Party manifestos promised a Breathing Space scheme that would see people in financial difficulty given better protections and a safer way to pay down debt. As a measure with cross-party support we urge the Government to turn these proposals into a reality as soon as possible. The Financial Conduct Authority must ensure that lending is responsible and affordability assessments are robust. Lenders must do more to ensure that clients do not get into problem debt, for example, banks should not be increasing people’s credit card limits without being asked to and action must be taken to reduce the cost of overdrafts.
“Just a few years ago we saw high levels of consumer borrowing leading to increased numbers of people in problem debt, we cannot and must not to repeat the mistakes of the past.”