How the Bank of England is looking to control the growth of personal debt
Within the last few days The Financial Policy Committee of the Bank of England has given notice of their intention to raise the UK’s counter-cyclical capital buffer (CCB) to 0.5% from 0.0%. What on earth does this mean and how might it affect the UK economy?
The idea of setting a counter-cyclical capital buffer target for banks originated from the financial crash of 2008 and 2009, those of us with long memories will know that without rescue from governments a number of very large and well known banks would have gone out of business as a direct result of the crisis. These banks failed because they simply held insufficient reserves of cash to withstand the number of bad debts experienced during that period. There followed a number of internationally agreed and domestic measures to try to ensure that having been bailed out once, large banks would never again have to rely on government support to survive any future crisis.
The most important measures are included within the Basel 3 agreement (named after the Swiss city which hosted meetings involving governments and central banks). The Basel 3 agreement applies internationally and demanded that all banks hold a certain percentage of the value of their loan book as cash reserves, or assets that can be easily converted to cash.
In addition to the internationally agreed actions referred to above, central banks such as the Bank of England, can apply additional rules that order retail banks, such as Lloyds or RBS, to hold additional cash in reserve, one such rule relates to the countercyclical capital buffer (CCB). A typical bank loan book will involve a variety of customer types, assets and finance products and one of the functions of a central bank is to assess the potential risk associated with different types of loans and ensure that sufficient cash is being held to guard against such risk by setting an overall target of risk weighted liquidity (cash reserve) for each bank. The term countercyclical indicates that the targets set by a central bank are set at a time when the banks are not under any financial stress.
The CCB target is expressed as a percentage of a bank’s loan book and will be added to the requirements dictated by Basel 3. In the UK It was cut to zero in the wake of last June’s Brexit vote in order to encourage lending to continue to flow and to help support the wider economy.
The Bank’s Financial Policy Committee have now given notice that it will raise the CCB from zero to 0.5 per cent and signaled that it expects to increase it again to 1 per cent in November, This move effectively increases the aggregate capital requirement of UK banks by £11.4bn and given that generating cash reserves necessitates increasing the profit margin on loans, we can expect to see both the cost and availability of some lending to be adversely affected. The decision was unveiled alongside the Bank’s twice-yearly Financial Stability Report and is a signal that regulators are now concerned about an excess of lending in the economy.
The Bank also said that it would publish tighter rules on consumer lending next month and bring forward an assessment of lenders’ potential losses on consumer credit, which has been growing strongly, and underpinning consumption growth since last summer.
Consumer credit grew at an annual rate of 10.3 per cent in April, which the Bank noted was “markedly faster” than household incomes. Within this, credit-card debt, personal loans and car finance were all sharply higher. By adjusting CCB targets, the Bank of England is looking to to restrict lending in certain high risk areas without affecting the wider economy as would happen by raising Bank Base Rate from the current level of 0.25%.
Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.
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