BoE to test banks against housing market shock
The Bank of England (BoE) has stated that its upcoming stress tests will focus on UK lenders' ability to withstand a housing market shock.Its Financial Policy Committee (FPC) revealed the number of Britons borrowing more than four times their income for their mortgage is at its highest level since records began in 2005. While approvals remain low, the amount of mortgages offered to buyers with small deposits had doubled over the past six months, the FPC noted.It also said that approvals remain 20 per cent below their long-run average. Prices, however, rose by around 10 per cent at a national level over the year to February 2014.In the meeting, which took place on March 19th, the FPC said it remains vigilant to emerging vulnerabilities and will take action if necessary.The stress test framework for the banks has yet to be finalised and will be published at the end of April. An EU-wide framework is also being constructed by the European Systemic Risk Board and the London-based European Banking Authority.It says the scenario being devised is not based on what it expects to happen but on a less favourable eventuality.Measures are currently being put in place to help maintain stronger mortgage underwriting standards as part of the Financial Conduct Authority's Mortgage Market Review. These are to take effect from April.Rob Wood, an economist at Berenberg Bank, told the Daily Telegraph that while the BoE can ensure lenders are well placed to cushion shocks, controlling house prices was not part of its remit."The [Bank's] remit is to control financial stability, so if house prices crashed but banks had a lot of capital put aside to protect them from that crash then that is fine. Of course, for the whole economy a big house price crash, and certainly for households who are affected, is not fine. So in that sense we may well see action ... too late," he said.
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