The Bank of England on Tuesday ordered banks to build thicker capital cushions in the months ahead to protect the U.K. financial system from risks ranging from Brexit to China to booming consumer borrowing.
The BOE's Financial Policy Committee said in its twice-yearly financial stability report that there are "pockets of risk" in the financial system that warrant vigilance from regulators and lenders.
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On the domestic front, the BOE said unsecured consumer borrowing in Britain is growing rapidly and lending standards in the mortgage market appear to be deteriorating, raising the risk that banks could face losses if the economy weakens.
It also flagged risks surrounding the U.K.'s exit from the European Union. The BOE said it is overseeing the financial system's contingency planning for withdrawal--including the possibility the U.K. crashes out of the EU without a deal on the terms of its divorce or future economic ties when a two-year window for talks closes.
"We start from the most difficult situation from a financial stability perspective," said BOE Gov. Mark Carney, explaining that while a "no deal" scenario might not be the most likely outcome, it would be the most threatening.
Officials said they are also monitoring potential threats from overseas. The risk to the global financial system from ballooning debts in China remains "pronounced," the committee said.
In response to these risks, which the BOE described as "standard" rather than elevated, the central bank said it raised banks' so-called countercyclical capital buffer to 0.5% from its current level of zero and expects to raise it again, to 1%, in November.
The buffer is designed to be raised when the economy is healthy to build resilience against losses and relaxed during a downturn to encourage greater lending.
Officials reduced the buffer to zero in July, part of a package of measures to support the economy following last year's referendum on leaving the EU.
"This action will supplement banks' already substantial ability to absorb losses," the BOE said.
Banks have six months to meet changes to their capital requirements, giving them until end-2018 to reach the 1% threshold. The increase represents around GBP11.4 billion ($14.5 billion) of extra capital across the industry as a whole.
The move follows months of concern about unsecured consumer borrowing in the U.K., which is currently growing at an annual rate in excess of 10% as consumers turn to debt to support their spending amid meager wage growth and higher inflation.
Officials said they want banks to perform stricter tests on borrowers to ensure they can afford repayments. However, they stressed that household borrowing was growing at the same rate as the economy, and didn't appear to be motivated by excessive risk taking.
"I wouldn't characterize the behavior of U.K. households as a whole as taking particularly elevated risks," Mr. Carney said.
The BOE's Monetary Policy Committee held the central bank's benchmark interest rate at 0.25% when it met earlier this month, but there are signs of growing dissent with the policy. Chief Economist Andy Haldane said in a speech last week that he may soon push for a rise in borrowing costs to restrain rising inflation.
Mr. Carney and other senior officials sit on both the MPC and the FPC and have a variety of other roles. In her valedictory speech last week, departing MPC member Kristin Forbes said that spread of responsibilities had given officials less time to develop their own views on monetary policy, and in particular understand the need for a rise in interest rates.
Mr. Carney dismissed that criticism.
"It takes as much time to decide to hold interest rates as it does to raise interest rates," he said. "I can assure you we devote the necessary time to making monetary policy decisions."
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(END) Dow Jones Newswires
June 27, 2017 07:42 ET (11:42 GMT)