LONDON: The Bank of England urged banks on Thursday to consider the risk of future spikes in interest rates when they approve mortgages, and prepared tools to rein back potentially dangerous lending.
British house prices have risen by around 10 percent over the past year, and the central bank said mortgages were higher as a share of home-buyers' income than at any point since 2005.
From next month the body that regulates how British banks lend to consumers, the Financial Conduct Authority, will introduce touger home loan underwriting standards.
The BoE said in a report of a quarterly meeting of its risk watchdog, the Financial Policy Committee, that from June it hoped to have the power to set the interest rate scenarios that lenders would have to consider when granting loans.
The central bank also said that when it conducts its part of European Union wide stress tests for banks this year, it would make them consider the risk of a sharp rise in interest rates and a big fall in house prices.
"The scenario was not intended to be the FPC's expectation of what would happen, but a coherent tail risk event against which banks' resilience could be tested," the BoE said.
The FPC made no new formal recommendations, but it said that concern about financial markets' readiness for a rise in interest rates was "now at the heart of the FPC's risk and vulnerability assessments".
This extended to emerging markets.
While financial markets had been little affected by turmoil in Ukraine and parts of China's financial markets, investors could have a false sense of security that interest rates will not return to more normal levels, the BoE said.
The BoE added that British banks' financial health had improved since its last report in November, but that uncertainty about the cost of past misconduct had increased.
Separately, the Bank published its terms of reference for an assessment of leverage ratios at banks, which it said would report back in November. However it will not set a numerical value for a leverage ratio until later.
Under a global accord known as Basel III, banks across the world must hold capital equivalent to at least 3 percent of their total assets on a non risk-weighted basis from the start of 2018.
The aim of the so-called leverage ratio is to serve as a backstop to a bank's core capital buffer, which is based on risk-weighted assets.
Policymakers in Britain, Switzerland and the United States have put more emphasis on the leverage ratio, saying banks can too easily game risk weightings in their core buffers.
Comments
Comments are closed.