The central bank’s Financial Policy Committee, which already has the power to tell lenders to adjust loan-to-value lending, aims to extend its control to altering projected interest rates in lenders’ affordability tests. It has asked the Financial Conduct Authority to consult on the proposal.
Bank of England governor Mark Carney told a press conference today: “Depending on the result of that consultation, we expect banks and building societies will be in a position that if the FPC decided to give guidance to use a higher interest rate, they will be able to implement that.”
He also stressed the FPC’s determination to use the tools at its disposal to prevent any slip in underwriting standards: “We know what good underwriting standards are. This is just basic. Why should we let standards deteriorate? Why should we stand by?”
The FPC, which was created this year and includes FCA chief Martin Wheatley, can already recommend lenders hold more capital to protect them against exposure to sectors where there is a perceived risk, such as higher loan-to-value mortgages and commercial lending.
Under the latest proposal, the FPC has recommended the FCA should require mortgage lenders to have regard to any future FPC recommendation on appropriate interest rate stress tests to use in the assessment of affordability.
The committee’s latest Financial Stability Report said it had an “extensive” toolkit which could be used in response to housing market risks: “These tools include recommendations on underwriting standards, the Help to Buy scheme and the availability of higher-risk loans, as well as recommendations or directions on bank capital requirements.”
A Council of Mortgage Lenders spokesman said: “The FPC’s view is welcome but lenders would like to see some more clarity over time about the circumstances in which that might be passed.”
The spokesman said this will benefit consumers as well as lenders: “Everyone benefits from a system in which there is clarity about how these signals will be communicated to people.”
