The Bank of England is relaxing bank lending rules to help prevent a potential financial crisis in the aftermath of the EU referendum, taking measures to allow banks to lend up to £150bn more to households and businesses.
Following the EU referendum on 23 June, the Bank of England has been monitoring the UK’s financial system closely and has today announced in its Financial Stability Report that some of the risks it outlined prior to the referendum have started to materialise.
“There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging,” the report states.
The report also warns that the period of uncertainty and adjustment, as the United Kingdom establishes new relationships with the EU and the rest of the world, is expected to lead to some market and economic volatility.
Between the 23 June and 1 July, the sterling exchange rate index fell by 9% and sterling hit its lowest level against the dollar in three decades. The equity prices of UK banks fell on average by 20% and equity prices of domestically focused companies dropped by 10%. The ten-year UK government bond yield also fell by 52 basis points.
“These moves reflect an increase in risk premia on UK assets, a perceived weaker growth outlook, and anticipation of some future deterioration in the United Kingdom’s terms of trade and supply capacity,” the report said.
Given that the Financial Policy Committee (FPC) is focused on promoting a financial system that ‘dampens, rather than amplifies’ the effects of uncertainty and adjustment on the UK’s economy, it is currently working to reduce any pressure on firms to restrict the delivery of financial services (including the supply of credit) and will be closely monitoring the risks of:
- further deterioration in investor appetite for UK assets
- adjustments in Commercial Real Estate markets leading to tighter credit conditions for businesses
- increasing numbers of vulnerable households
- rapid growth in buy to let mortgage lending
- the outlook for the global economy
- reduced and fragile liquidity in core financial markets
Importantly, it has taken steps to release banks from a requirement to hold £5.7 billion in capital buffers, which are intended to be built up in times of calm and released during times of stress. In doing so this will raise banks’ capacity for lending to UK households and businesses by up to £150 billion.
According to The Guardian newspaper, banks are currently holding £130bn more capital than they were before the 2008 crisis and more than £600bn of assets, that can sold be quickly during times of crisis.
When asked during a press conference whether now is a good time to borrow money, Mark Carney, governor of the Bank of England said:
"We always advise people to be prudent especially if you’re taking out a mortgage".
"You want to be able to ensure that you can service that mortgage even if times are tough, so thinking about where interest rates will go, where wages will go in the lifetime of that mortgage. But the system should be there if you want to take out a mortgage because of the hard work of the last seven or eight years to make sure there is money to borrow if you need it”.
David Whittaker, MD of Mortgages for Business commented:
“The mortgage market has new challenges to face up to, but the chance of a lower base rate doesn’t mean that mortgage rates will be reduced. Only those on existing Bank Rate trackers will really benefit. Mortgage pricing is largely dictated by the cost of borrowing on the money markets and the current uncertainty around liquidity will mean that some lenders will not want to reduce their rates. They may even be keen to sustain current levels or increase pricing in order to regain some of the lost margins of recent months.
“Today’s report shows the FPC has its ear to the ground over the risks buy to let poses to stability. Mark Carney was correct was he said there as a downside to buy to let growing unsustainably, and I maintain that around 17% of total lending is a sensible size for the sector. While BTL lending may fluctuate in the short-term, there is a very strong core of stable low loan-to-value (LTV) lending to landlords, which is unlikely to contribute to instability. The current regulatory regime adds to this strength.
“Ultimately, property will remain an attractive investment, and we are highly unlikely to see any kind of investor exodus on the scale feared by the FPC. Demand for rental accommodation will remain high, and the sector is much more stable as an investment than the wildly fluctuating post-Brexit bond and equity markets.”
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