Quintons on Bank Of England Panel of Business Contacts

On a regular basis, a representative from the Bank of England comes to our office for a discussion with myself and my Co-Director, Simon Quinton Smith. We talk to them about our business activities and that of our clients such as are things improving or getting more difficult, is Bank lending improving or not, and the benefit of doing this is that we get up-to-date summaries of business conditions in the UK.

We receive monthly bulletins on the economy and the headline points from the most recent monthly reports are as follows:

The Financial Policy Committee aims to ensure the UK financial system is resilient to the wide range of risks it faces but assesses the overall risks from the domestic environment to be at a standard level.  

However, there are pockets of risk that warrant vigilance:

• Consumer credit has increased rapidly, lending conditions in the mortgage market are becoming easier and lenders may be placing undue weight on the recent performance of loans in benign conditions.  Banks have more risks if loans go bad.

Credit Cards are offering longer interest free periods and lenders are using lower risk rates.

Auto and personal credit are also rising with consumer credit overall increasing by 10.3% over the past 12 months to April 2017.

• The Global economy is ok – stronger than expected – but credit grows rapidly in China and UK Banks have large exposure to China and Hong Kong.

There are high levels of non performing loans in Euro countries – Italy, Portugal, Spain, Greece – and there is a risk of spill backs to UK Banks.

• Asset Valuations in some sectors are high – commercial Real Estate, Equity and Corporate Bond markets, perhaps also residential property, and there are risks of a correction in due course.

• Brexit financial stability risks – there are a range of possible outcomes for and paths to the United Kingdom’s withdrawal from the EU.

To ensure that the financial system has the resilience it needs, the FPC is:

• Increasing the UK counter-cyclical capital buffer rate by 0.5% and has stated that it wants to move it gradually to 1.0% at its November meeting.  This provides a buffer of capital that the Banks can release if necessary.

• Bringing forward the assessment of stress losses on consumer credit lending.

• Clarifying its existing insurance measures in the mortgage market designed to prevent excessive growth in the number of highly indebted households.

• The risk from Cyber attacks continues to build and evolve and the FPC is setting out the essential elements of the regularity framework for maintaining Cyber resilience and this testing is nearing completion.

Conclusion

• The UK banking system is much more resilient than ten years ago and continues to strengthen.

• The FPC considers risks standard.

• The FPC measures will help to ensure that the people of the UK can move forward with confidence and be able to access the financial services they need in order to service the opportunities ahead.

Finally, the possibility of an interest rise is strengthening and an interest rate rise is good because the economy has strengthened and the outlook is positive.

However, mortgage debt is an issue.  Any rise will be slow probably 0.25% at a time, eventually only reaching 2.5%-3.0%, lower than the pre-crisis levels.

Shane Prater.