The Financial Policy Committee (FPC) assesses the overall risks from the domestic environment to be at a standard level: most financial stability indicators are neither particularly elevated nor subdued.
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.
The FPC is increasing the UK countercyclical capital buffer (CCyB) rate to 0.5%, from 0% (see Box 1). Absent a material change in the outlook, and consistent with its stated policy for a standard risk environment and of moving gradually, the FPC expects to increase the rate to 1% at its November meeting.
The FPC supports the intentions of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) to publish, in July, their expectations of lenders in the consumer credit market. Firms remain the first line of defence. Effective governance at firms should ensure that risks are priced and managed appropriately and benign conditions do not lead to complacency by lenders.
The Bank’s annual stress test assesses banks’ resilience to risks in consumer credit. Given the rapid growth in consumer credit over the past twelve months, the FPC is bringing forward the assessment of stressed losses on consumer credit lending in the Bank’s 2017 annual stress test. This will inform the FPC’s assessment at its next meeting of any additional resilience required in aggregate against this lending.
The FPC has clarified its existing insurance measures in the mortgage market, designed to prevent excessive growth in the number of highly indebted households. Lenders should test affordability at their mortgage reversion rate — typically their standard variable rate — plus 3 percentage points. This will promote consistency across lenders in their application of tests to assess whether new mortgage borrowers can afford repayments.
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. The FPC will oversee contingency planning to mitigate risks to financial stability as the withdrawal process evolves (see Box 2).
Irrespective of the particular form of the United Kingdom’s future relationship with the European Union, and consistent with its statutory responsibility, the FPC will remain committed to the implementation of robust prudential standards in the UK financial system. This will require a level of resilience to be maintained that is at least as great as that currently planned, which itself exceeds that required by international baseline standards.
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. Banks’ ability to withstand these risks is being tested in the 2017 stress test scenario.
Progress has been made in building resilience to cyber attack, but the risk continues to build and evolve. Regulators are nearing completion of a first round of cyber resilience testing for all firms at the core of the UK financial system, in line with the Recommendation from the FPC in 2015.