Mortgage lenders are in a better position currently than they have been during previous financial shocks, a member of the Bank of England’s financial policy committee has said.
During a speech last week, Dame Colette Bowe, external member of the committee and former chair of the UK Banking Standards Board, reiterated the BoE’s position that the current shock being experienced by the financial system does not pose the same threat as previous shocks.
Speaking at Bayes Business School for a research workshop on the future of financial mutuals, Bowe gave an overview of the FPC’s view on household indebtedness and the BoE’s mortgage market tools and how they relate to financial stability.
Referencing the interplay between mortgage debt and financial stability that characterised the 2008 global financial crisis, Dame Bowe said it was important to remember the role mortgage debt and lender resilience play in financial stability.
“Unsustainably high mortgage debt has historically affected UK financial stability via two channels. The first is through the effect on borrower resilience, where highly indebted households face challenges from real income cuts and/or mortgage rate increases and cut spending sharply - which can amplify a downturn, with potentially systemic consequences for financial stability,” Bowe said.
“Second, shocks can be transmitted to financial stability through the lender resilience channel, where lenders experience losses when highly indebted households face re-payment difficulties. These losses can result in a reduction of the supply of credit to households, businesses and the wider economy.”
Bowe added the BoE maintains its position that the current shock “does not at this stage pose the same risks to lenders and the financial system as previous shocks” but that the PFC continues to monitor the resilience of banks to further downside risks.
“Lenders are well capitalised and have limited direct exposures to Russia and Ukraine, as well as being resilient to risks stemming from sectors which are particularly exposed to higher commodity prices,” Bowe said.
Yorkshire Building Society director of mortgages, Ben Merritt agreed with Bowe and said he was confident that the industry will weather the current conditions.
Merritt said: “Whilst we accept that the current economic conditions are quite unique and will likely have a significant impact for a long time to come, the regulatory environment and the resilience of the financial services sector provides us with confidence that the industry will weather these conditions.
“We regularly assess the market outlook, conducting thorough stress testing, and we remain confident in our position as a safe and secure financial organisation”.
This sentiment was also echoed by Natwest’s chair and former deputy governor of the Bank of England, Sir Howard Davies.
Commenting on rising energy costs and the economic outlook last week, Davies told BBC Radio 4 that “it's important we do not talk ourselves into a worse situation than we are actually in”.
“The economy is not in that bad of shape. We've seen at the bank that consumer spending has been fairly robust. People's deposits, and deposits of customers in banks have actually still gone up in the first half of this year, and we are not seeing significant distress in the mortgage market,” Davies said.
Later this month, the FPC will launch its annual cyclical scenario stress test, which will assess the UK banking system’s resilience to deep simultaneous recession, real income shocks as well as large falls in asset prices and higher global interest rates.
But Bowe pointed out that the FPC is also conscious of less severe scenarios and the pressure the rise in living costs and interest rates will put on UK households over the coming months.
“This will test the degree of borrower resilience in the system as borrowers struggle with bills or [to] manage their other spending commitments,” Bowe said.
jane.matthews@ft.com
