Price wars in the mortgage market have led lenders to “risk up”, said Sam Woods, Bank of England deputy governor for prudential regulation and chief executive of the PRA.
The rise in exposure was evidenced by a significant increase in firms’ appetites for higher loan-to-value and loan-to-income lending and an upward shift in the high loan-to-value share of new lending. The regulator also noted a “dramatic fall” in the spreads demanded above the risk-free rate.
“Now, it may be that these shifts are well within firms’ management capabilities, and they should be well captured by our capital framework. But we should be watching them like a hawk,” said Woods (pictured).
The PRA pointed to the downward trend for UK mortgage risk-weights among large firms that use internal models to manage risk. The UK risk-weight averaged 9.7 per cent in 2018, down from 15.1 per cent in 2009. “In other words, capital requirements dropped by a third,” Woods said.
The PRA chief was speaking at the Building Societies Association’s 150th anniversary conference on Friday 24 May 2019. The shot across the industry’s bows follows on from a “horizon-scanning” initiative designed to pre-empt and mitigate risks.
Woods added that firms “may risk up in ways that are excessive or not properly controlled or capitalised,” and that there may be “incentives to find the weak spots in the new regulatory framework”.