FPC takes macroprudential action: The Financial Policy Committee (FPC) has published its semi-annual Financial Stability Report and the record of its meetings on 17 and 25 June, where it makes recommendations to limit the risks arising from household indebtedness. The recommendations are:
- mortgage lenders should apply a 3% interest rate stress test when assessing affordability over the first five years of the loan;
- mortgage lenders should not extend more than 15% of their total number of new residential mortgages at loan to income (LtI) ratios at or greater than 4.5. This recommendation applies to all lenders which extend residential mortgage lending in excess of £100 million per annum.
PRA is asking for comments, until 31 August, on its proposals to implement the LtI cap. PRA is proposing to use the Product Sale Data (PSD) return to determine whether a firm is above the threshold and whether it is complying with the limit. It also clarifies that the limit would apply to the number of mortgages, not their total value. FCA has said that it will consult on guidance, as the LtI cap will only affect a small number of FCA regulated firms. Regarding the 3% interest rate stress test, FCA says that mortgage rules already require firms to have regard to it.
Despite the very high aggregate level of credit in the UK economy, the FPC has decided to set the CCB at 0%. In reaching this decision, FPC has factored in improved banks' balance sheets and fewer imbalances outside the banking sector. Regarding its role in reassessing the regulatory perimeter, FPC is not recommending any action but has requested work on possible systemic risk arising from the growth in asset management. Some of the existing recommendations on contingency planning, capital levels and crisis in the Euro area have now been closed. (Source: Financial Stability Report, FPC Minutes, PRA Consultation on Housing Instrument 2014 and FCA Response)