The central bank has said that credit conditions in Britain have largely recovered from the financial crisis, but has warned that asset prices are vulnerable to a big rise in interest rates and emerging market risks, making it necessary for banks to hold extra capital.
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It would be possible for the state to definitively recession-proof banks by requiring extremely high capital ratios, but doing so would greatly increase the costs of finance to the real economy.
Mr Carney said the “elevated” worldwide security concerns, in the wake of the attacks in Paris and amid the worsening situation in the Middle East, had been taken into account when assessing the UK’s overall financial resilience. Carney said there was absolutely no political pressure on the BoE to ease the pressure on lenders.
The BoE also released the results of annual “stress tests” into how Britain’s big seven lenders would deal with unexpected economic shocks.
Barclays PLC (BCS) shares moved up 2.9%, and Lloyds Banking Group PLC (LLOY.LN) (LLOY.LN) popped up 2.8%.
Asked at a press conference in London on Tuesday about the impact on interest rates of stricter bank capital requirements, the central bank governor more or less said the name of the game is actually the whizzy new macroprudential tools wielded by the bank’s Financial Policy Committee.
The CCB aims to rein in risky lending at frothier stages of the credit cycle.
The seven lenders included in the stress tests were: HSBC, RBS, Lloyds, Barclays, Santander UK, Standard Chartered and Nationwide Building Society.
The Prudential Regulation Authority (PRA), another overseeing body in the stress testing process, did not recommend that the RBS should submit another capital plan. Another was general fragility in global financial markets after a long period of ultra-low interest rates in the developed world, which may have led investors to undervalue assets. Last year, the Co-operative Bank was given a warning but its management was on top of the BoE’s concerns, so it was ruled there was no need for a new savings plan.
The Treasury is also weighing up whether to give the Bank’s Financial Policy Committee new powers to intervene in the buy-to-let market, which is now unregulated.
Banks taking part in the FLS lent a net 1.1 billion pounds ($1.7 billion) to small and medium-sized businesses in the first six months of 2015, in contrast to a net reduction in lending of almost two billion pounds previous year.
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The FPC said in its bi-annual Financial Stability Report that it remained “alert to financial stability risks arising from rapid growth in buy-to-let mortgage lending and notes the difference in underwriting standards in the owner-occupier and buy-to-let mortgage markets”.
