The Bank of England will tell the UK’s banking sector to store up billions of pounds as a cushion against future shocks to the financial system.
It is reintroducing so-called “countercyclical capital buffers”, which will ensure that the nation’s banks have reserves to cope with problems.
The Bank reduced the buffers to zero last July in the wake of the Brexit vote in a bid to free up lending to households and businesses and dampen the impact of financial market uncertainty.
That change is now being reversed, meaning banks will be asked to set aside an extra £5.7bn of savings in the coming months.
The Bank of England expects that they will then be asked to find a further £5.7bn in November.
In its twice-yearly Financial Stability Report, the Bank of England said the threats to the UK economy were not particularly significant.
However, it did point to the “rapid increase” of consumer credit as a cause for concern, saying that lenders had appeared to become overly relaxed “in benign conditions”.
The Bank of England is worried that billions of pounds worth of deals are being offered for many consumers have built up deceptively respectable credit scores in recent years, thanks to the low interest-rate environment.
Consumer credit borrowing has grown by more than 10% over the past year, many times the rate by which wages have gone up.
Those fears have led to two separate reports from regulators (the Financial Conduct Authority and the Prudential Regulation Authority), which will be published next month and are expected to set out how lenders should manage their finances.
In addition, the Bank of England is to bring forward “stress tests” on consumer credit lenders, in order to ensure they can deal with shocks such as a rapid rise in interest rates.
Consumer credit has grown much faster than household incomes, leading to fears that some people have taken out borrowing they simply cannot afford.
The Bank, however, has indicated that its biggest concern is that lenders will struggle to cope with the effects of an economic downturn.
While consumer credit is a much greater concern than mortgage borrowing, the Bank has also enforced rules designed to control the mortgage market.
Having previously “recommended” that finance companies should impose strict limits on lending at a rate of 4.5 times a person’s income, that recommendation has now been turned into a policy “that will remain in place for the foreseeable future”.
The Bank also wants to see stricter tests on whether a house buyer could cope with a rapid rise in interest rates.
It is, however, worried about a different type of property – noting a rapid rise in the value of some commercial property, particularly in the West End of London.
These, say the report, are based on low interest rates, but don’t factor in the pessimism and uncertainty that caused those low rates in the first place.
On Brexit, the report says the Bank is looking at “the full range of possible outcomes”, including no deal being done.
It says that, irrespective of outcome, it would maintain “a level of resilience to be maintained that is at least as great as that currently planned” – a rejoinder, perhaps, to those who warned of the UK becoming a low-regulation tax haven once it leave the EU.
And the Bank’s report says that, taking into the account the huge size of the UK’s financial services industry, the risk of post-Brexit disruption to the financial sector in the EU is greater than the risk of disruption to the UK
But the greatest warning of disruption from abroad was not about Europe, but China.
The Bank’s report says that China’s debt burden now stands at 257% of GDP, described by one observer as “one of the biggest credit booms in history”.