Bank of England tightens capital requirements as debt surges

The Bank of England on Tuesday said retail lenders need combined capital reserves of £11.4 billion ($14.5 billion, 12.9 billion euros) by the end of next year as UK household indebtedness surges.

As expected, banks are from Tuesday increasing the UK countercyclical capital buffer rate from zero percent to 0.5 percent, or by £5.7 billion, the BoE’s Financial Policy Committee watchdog said in a bi-annual report.

It added that the FPC expects to increase the rate to 1.0 percent in November, with binding effect a year later.

“The increase to 0.5 percent will raise regulatory buffers of common equity Tier 1 capital by £5.7 billion,” the report said.

“This will provide a buffer of capital that can be released quickly in the event of an adverse shock occurring that threatens to tighten lending conditions.”

The BoE noted that consumer credit for items such as cars jumped by 10.3 percent in the year to April — “markedly faster than nominal household income growth”.

In a press conference following the report’s release, BoE governor Mark Carney warned lenders against “forgetting the lessons of the past”.

However, he insisted also that Britain’s banking sector was strong, and “significantly” more resilient since the financial crisis of almost a decade ago.

At the same time Tuesday, the BoE’s report expressed concern about the mortgage market and called on banks to tighten affordability tests for home loans.

“Consumer credit has increased rapidly,” the report said.

“Lending conditions in the mortgage market are becoming easier. Lenders may be placing undue weight on the recent performance of loans in benign conditions,” it added.

While British economic growth has held up well since the vote for Brexit a year ago, recent official data showing soaring UK inflation is putting pressure on the BoE to raise its main interest rate from a record-low 0.25 percent — a move that would put further pressure on consumers’ affordability.

British inflation surged in May close to a four-year high at 2.9 percent, as a Brexit-fuelled slump in the pound pushed up import costs.