The Bank of England has announced that it will force banks to find a further £11.4 billion in the next 18 months to beef up their finances against the risk of bad loans. Banks will have to set aside £5.7bn in the next six months in case future economic shocks mean some borrowers cannot keep up their repayments.
The Bank of England has also tightened mortgage affordability rules to prevent loosening underwriting standards and warns it will cause some lenders to raise interest cover ratios. The Bank formerly said that lenders should test affordability by checking how borrowers would react to a three per cent increase in base rate. But the new rule says lenders should instead consider how borrowers would handle a 3 percent increase in firms’ standard variable rates.
The Bank says lenders have been using different approaches and coming up with different stressed interest rates to test affordability, leading to “lack of consistency across the market”. The old rule lets some lenders choose whether the correct rate was the one at the point the mortgage was sold or the rate it reverted to.
The rules in the Bank of England’s latest Financial Stability Report means that around 0.5 percent of all 2016 mortgage approvals would not have met the requirements of the new rules.
In response to the Report, Mike O’Connor, Chief Executive of StepChange Debt Charity, 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 bills . 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 the 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.”
Angus Dent, CEO of P2P lending platform, ArchOver, focused on what the report mean for for British businesses. “The latest financial stability report from the Bank of England is full of mixed messages. On the one hand, the governor says that rates should not rise in the short-term and the Bank is continuing with economic stimulus to support growth. On the other hand, the Bank is nuancing this with higher lender criteria.”
“Tightening consumer lending will always have an adverse effect on business and British plc won’t be reassured by any of the measures in today’s report. It’s an obvious thing to say but consumers buy what business makes. If they buy less then business will suffer. Hearing that customers won’t be able to buy so easily on credit, increases uncertainty and will delay investment decisions and refinancing agreements even further. This reflects the wider problem that Britain is facing – there is a lack of consistency plaguing businesses that is driving more uncertainty. And uncertainty ultimately leads to a decrease in investment at a time when we need to be focused on fostering the health of Britain’s businesses.”