Mark Carney and the Bank of England relax rules for UK banks

A clear feature of the post Brexit referendum situation is a fall in bank share prices and perceived prospects. A chill wind has gone through not only UK bank share prices but also European ones. Bloomberg have published this morning the results of a stress test model produced by New York University and unlike the official efforts it was signalling problems before Brexit day.

Even before Brexit, the model suggested that banks were much more fragile than official stress tests indicated: As of May 31, it estimated that the largest banks in the U.S., U.K., Germany, France and Italy (those with more than $500 billion in assets) would have a combined capital shortfall of $998 billion.

After the referendum it felt that this had happened.

After the Brexit vote, the shortfall rose significantly. As of June 28, it stood at $1.163 trillion, an increase of $165 billion.

Actually the UK is not top of the shortfall list as unsurprisingly it is headed by the United States but food for thought is provided by the fact that France is in second place and not the UK. If we move to relative economic size I note that the shortfall is highest in France at 12% of its Gross Domestic Product whereas the UK is just over 10% and the US a relatively mere 2%.

Some care is need here as we learn something but need to take care how much. Whilst we note that one can construct a stress test which more than the token bank actually fails this one has its own flaw. That is the way that it only looks at the larger banks and so records more problems in countries which have some combination of larger economies and a more concentrated banking system. For example it therefore rates Italy as relatively low risk ( a capital shortfall a bit under 5% of GDP ) because many of its problems are relatively small banks. For example the non performing loans at Monte dei Paschi di Siena that have come to the attention of the ECB are very big for it ( 38 billion Euros) but small relative to the scale used here.  That is why its shares are suspended as I type this at a price 7% below what was only yesterday a record low.

The UK economy

The banks do not exist in a vacuum as they both feed (hopefully anyway) and depend on the underlying economy. Bloomberg put it like this.

Why the pessimism? For U.K. banks, it’s pretty straightforward: Forecasters expect increased uncertainty and other Brexit-related difficulties to undermine economic growth, which in turn will narrow profit opportunities and make it harder for people and companies to pay back loans.

So troubled water is the immediate outlook as we await to see how we bridge it. This morning has brought further news from the front line or at least the Markit Purchasing Managers Index business surveys.

The PMI surveys indicate that the pace of UK economic growth slowed to just 0.2% in the second quarter, with a further loss of momentum in June as Brexit anxiety intensified.

That feeds into a picture where in terms of GDP growth we had been slowing ( 0.7% and then 0.4%) but also into a picture where that latest official industrial ( up 1.6% year on year in April) and manufacturing data had been relatively good.

A possible vulnerability

Whilst there may be issues over the mortgage book in time in the more immediate period we are more likely to see a signal from the unsecured credit which was growing so strongly.

Consumer credit increased by £1.5 billion in May, in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.7% and 9.9% respectively.

The Bank of England

It has a Financial Policy Committee for supervising the banks which is entwined in a spider’s web of bureaucracy with the Financial Conduct Authority and the Prudential Regulatory Authority. Last time the UK has a tripartite structure it failed utterly but I guess in Sir Humphrey’s world it was considered a triumphant model! As to the FPC itself apart from the Governor Mark Carney and perhaps Deputy Governor Ben Broadbent it is made up of individuals that very few people have ever heard of. I do know one other as some time ago I used to work with Clara Furse in the days before she became a Dame. In fact she did come to some attention as her appointment was criticised back in the day but the “serious concerns” of some MPs back then did not stop her being reappointed earlier this year.

What have they told us?

In the past they have continually told us that they are “vigilant”. I have been unkind and pointed out that they may have been vigilant about the Bank of England tea trolley but much less so about the boom in buy to let mortgage lending. This morning however the story has changed somewhat. Let us start with them looking firmly in the rear view mirror.

the UK commercial real estate (CRE) market, which had experienced particularly strong inflows of capital from overseas and where valuations in some segments of the market had become stretched;

Horse meet stable door as of course not only was the Standard Life property fund suspended yesterday but last week other commercial property funds imposed exit penalties. Moving on we see that the FPC has other concerns.

The FPC has monitored these channels of risk closely. There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging.

So closely is the new “vigilant”. We also get some actual measures of the position.

Equity prices of UK banks have fallen on average by 20%, with UK-focused banks experiencing the largest falls….Between 23 June and 1 July, investment-grade corporate bond yields fell by around 25 basis points. Wholesale debt funding costs for the major UK banks fell by a similar amount. Overall bank funding costs — taking into account any increase in the cost of equity and the change in wholesale debt funding costs — are broadly unchanged since the referendum.

So there is some good news there which is that overall bank funding costs are pretty much unchanged although some have risen and some fallen.

What will they do?

This was announced at 10:30 am today.

The FPC reduced the UK countercyclical capital buffer rate from 0.5% to 0% of banks’ UK exposures with immediate effect . Absent any material change in the outlook, and given the need to give banks the clarity necessary to facilitate their capital planning, the FPC expects to maintain a 0% UK countercyclical capital buffer rate until at least June 2017. …….. It will reduce regulatory capital buffers by £5.7 billion, raising banks’ capacity for lending to UK households and businesses by up to £150 billion.

You may note that this change has an implied multiplier of up to 26 from the change in bank capital rules. To stop some of the money leaking away this a ban on increases in dividends and also stock buybacks have been imposed.


This is a quantity move by the Bank of England and is a type of what is called macroprudential policy. In terms of numbers in his press conference Governor Carney said that net bank lending in the UK was £60 billion last year or 40% of the change in capacity announced today. Also these rules apply to three-quarters of the UK’s banks who make some 90% of the total of bank lending. So far the Governor’s performance has been much more like that on the Friday morning post the Brexit referendum which reminds me of this from Meatloaf.

‘Cause two out of three ain’t bad

However there is a catch which is that as for example Governor Kuroda has found in Japan and Mario Draghi in Europe you can expand the supply of credit all you like at the central level but will there be demand for it? Also will the banks respond to the central changes and actually supply credit as we wonder how the banks will interpret the word “viable” that Governor Carney has on repeat today.

Also a long running theme of mine gets a bit of emphasis.

the financing of the United Kingdom’s large current account deficit, which relied on continuing material inflows of portfolio and foreign direct investment;




The fall and rise of the 100% mortgage in the UK

One of the features of the credit crunch era has been the way that the various establishments make all sorts of promises along the lines of “never again” and then after a delay return to past behaviour. A type of reversion to mean if you like. If we look back to the pre credit crunch era then the peak of if you prefer nadir for one type of behaviour was the 125% mortgages under the Together banner issued by Northern Rock and yes you could borrow 25% more than the value of the property the mortgage was secured on. What could go wrong? Sadly many borrowers found out.

Actually this was not the only problem with Together mortgages as this from the bad bank NRAM which holds them now shows.

For example, a Together customer with a mortgage of £100,000, a loan of £15,000 (both still with NRAM) and a current interest rate of 4.79% with 15 years term remaining would be paying £60 per month on just their £15,000 loan.

Yes they involved an unsecured loan which has mostly got forgotten over time but this added to the debt burden by being over the mortgage term rather than say the 5 years or so of a loan. The advertisers call this helping with monthly payments, but look what it does to the total debt. This is illustrated by taking a loan at a higher interest-rate but crucially for a shorter period.

Switching the £15,000 loan to a 5 year deal elsewhere with an interest rate of 5.99% would mean a new repayment of £290 per month, which does sound like a big increase.

But the loan would be paid off a whole 10 years sooner, saving a whole £16,394 in interest payments.

The return of a 100% mortgage

You might think that such a thing was not possible as back in the day there was a queue of politicians telling us that such things were a sign of irresponsibility in the system. From the Guardian in 2009 from the Liberal Democrats Treasury Spokesman.

In the current housing market, with prices falling steadily, the 100% mortgage is an insane risk for any lender……most people would surely accept that we need to restore greater responsibility to money lending.

From the BBC on the 22nd of February 2009 and the emphasis is theirs.

Banking minister Lord Myners has said banks were “foolish” to offer 100% mortgages, after Gordon Brown called for “prudent and careful” lending.

Lord Myners said costly lessons had been learned worldwide “about reckless, feckless, witless lending”.

Here was the conservative party spokesman.

Shadow treasury chief secretary Philip Hammond accused the prime minister of “trying to shut the stable door on irresponsible lending long after the horse has bolted”.

Some of you are probably already singing along with Carly Simon.

But if you’re willin’ to play the game
It’s comin’ around again

Barclays Family Springboard

Let us examine the details and here is the opening pitch.

Apply for a Family Springboard mortgage of up to £500,000 on a property in the UK, without a borrower deposit.

The details remain in a world where a 5% deposit was required but the Press Association is more up to date.

Customers with an income of more than £50,000 will be able to borrow up to 5.5 times their income, up from a maximum multiple of 4.4.

I suppose that would have to raise this amount for the thing to work and the interest-rate is show below.

A buyer without a deposit could get a three-year fixed rate of 2.99% under the family springboard mortgage

Seems very cheap for a 100% mortgage does it not? But of course most interest-rate rates seem like that these days.

Bank of Mum and Dad

These are required here but only for three years and the deal is sweetened for them as shown below.

They open a Helpful Start Account with 10% of your purchase price at the same time you apply….They get their savings back after 3 years with interest, as long as you keep up the repayments.

If we start with their position they will get an interest rate of 1.5% over Bank Rate so 2% currently which is pretty good considering. Crucially they are only backing the payments for the first three years and then get their money back plus interest. Their intervention leaves us with a curious somewhat bi-polar situation where the borrower gets a 100% mortgage but the bank would argue that it only has the risk of one of more like 92% if we allow for the fact that it will have reduced during these three years. Of course we are then left with the issue of whether 92% is too high at this level of house prices.

We know that the Bank of Mum and Dad or BOMAD is rather busy these days.

Analysis by Cebr for Legal & General shows that, as of 2016, a quarter (25%) of all homeowners received help when they bought the home they live in.

Indeed the numbers below are rather eye-catching.

Based on the figures and home purchase prices, we estimate that, in total, family and friends will spend £5bn in 2016 to help support the purchase of £77bn worth of property. This puts the Bank of Mum and Dad in the top ten mortgage lenders in the UK.

There are quite a few issues here and the most obvious is this one.

The Bank of Mum and Dad is not adequate in that it fails to address the needs of those without parental wealth,

To Infinity and Beyond

Well for many of us anyway as we note this development from last month. From Hodge Lifetime.

The 55+ Mortgage is an interest-only mortgage available to borrowers aged 55 or above…….The maximum term we allow is up to when the youngest borrower reaches age 95.

Youngest borrower reaches 95? That pretty much covers everyone does this not? It also sets us further down the road which Japan travelled as it headed towards what are called intergenerational mortgages. A little care is needed as the old limits at 65 are out of date with flexible retirement terms and increasing life spans but it is hard to have any support for a mortgage which is interest-only and goes to 95. What court would enforce terms on a 95 year old……

The Bank of England

The Financial Policy Committee wants us to think this.

the FPC remains vigilant to risks in this area.

Meanwhile it peruses the Bank of England tea trolley to see what cakes are on it and dreams of the menu for luncheon.


There is much to consider here and it is typical of the times that we have a mortgage which is in one sense a 100% one as in from the borrower’s point of view whereas from the bank’s point of view it is more like a 92% one. Also on the 10% BOMAD “Helpful Start” it makes a turn by paying 2% to them but charging 2.99% on the mortgage. I also note that the mortgage borrower will be paying interest on the amortised value of the full loan rather than 90% so over time that will be expensive.

Everybody is happy? Well if house prices have gone up yes and not to bad if they have stayed the same but difficult if they have fallen. On that front I have some worrying news for you provided by Legal and General.

Of 88 economists questioned by the Financial Times to assess the impact of government policies, none expected a general fall in prices.

Oh and of course all this is happening at a much higher level of house prices compared to earnings than before.