BoE insists on extra capital buffers amid debt bubble

UK banks will have to earmark an additional £10 billion to help insulate them against consumer credit losses after the Bank of England (BoE) warned that lenders are 'underestimating' soaring household debt.

The headquarters of the Bank of England. Picture: Peter Macdiarmid/Getty Images
The headquarters of the Bank of England. Picture: Peter Macdiarmid/Getty Images

The Bank’s financial policy committee (FPC) said it had decided banks were now in a more risky position even though climbing debt levels did not pose immediate risks to the British economy.

• READ MORE: Financial news

Sign up to our daily newsletter

The FPC, whose remit is systemic risk, credit bubbles and economic growth, said: “Within a benign overall domestic credit environment, there is a pocket of risk in the rapid growth of consumer credit.

“This is not a material risk to economic growth, as consumer credit represents only 11 per cent of overall household debt. It is a risk to banks’ ability to withstand severe economic downturns.”

The FPC acknowledged that the quality of consumer credit had improved significantly since the financial crash of 2008, but warned that lenders were using the wrong benchmarks.

“Lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality. As a result, they have been underestimating the losses they could incur in a downturn,” the regulator added.

It said it believed that commercial banks were exposed to collective potential losses of about £30bn. That is £10bn more than previously estimated by policymakers, and representing about one-fifth of consumer credit loans.

The FPC added that new capital buffer requirements will be set for individual lenders after the next set of stress test results are published on 28 November ”so that each bank can absorb its losses on consumer lending, alongside all the other effects of the stress scenario on its balance sheet”.

The Bank’s stress test exercises are meant to measure the strength of banks’ balance sheets to handle an exceptional economic and financial markets’ downturn – previously including a recession, a surge in unemployment, sharply rising interest rates and collapse in property prices and stock markets.

The FPC said it was also likely to raise the counter‑cyclical capital buffer later this autumn to strengthen banks’ capital ratios.

“Absent a material change in the outlook, the FPC expects to increase the rate to 1 per cent at its November meeting, with binding effect a year after that.”