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From 1 July 2017, the finance and banking industry operating in the UK will be represented by a new trade association, UK Finance. It will represent around 300 firms in the UK providing credit, banking, markets and payment-related services. The new organisation will take on most of the activities previously carried out by the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association.x
Written by Richard Woolhouse, Chief Economist, BBA
On Thursday we will hear about any agreed actions from last week’s FPC (financial policy committee) meeting. In addition the latest assessment of financial stability by the Bank will be released (the Financial Stability Review). This meeting has taken on some extra significance as the ground has clearly been shifting as regards the MPC and its likely first move away from the “emergency settings” of monetary policy which have been in place for more than five years.
In the last press conference of the MPC back in May the Bank Governor went out of his way to impart a “dovish” tone to his comments and made it clear that whilst the developments in the housing market were a potential concern the FPC could act before a general rise in interest rates would be needed. This position seemed to shift markedly when at the Mansion House speech on June 12th he talked about the risks of rates rising earlier than markets expected.
So what is the FPC trying to achieve? This is hard to assess as not only does the “macro prudential” policy body have an extremely broad remit but also many of its tools are untested. My colleague Adam Cull set out the objectives and powers of the FPC in a recent note. The role of the FPC is partly focused on stability objectives but is also inevitably an additional set of macroeconomic tools the Bank can use to achieve its overall mandate. This can lead to some confusion as the settings of monetary policy and the deployment of tools by the FPC might conflict with one another. This is akin to driving a car with the foot to the floor whilst trying to judiciously use the break and can be a recipe for confusion.
The immediate focus is the housing market which Sir John Cunliffe has said in a recent speech is “flashing amber” on the FPC’s dashboard. The question is what they might do to address this development? If they feel that the stability problem engendered by the housing market lies with the banks they can specify that banks hold more capital (sectoral capital requirements) otherwise if the fear is excessive indebtedness they can move to restrict (loan to value) LTV or (loan to income) LTI ratios directly. They can also tighten the stress tests which are now applied around interest rates. These moves look very possible and indeed the Chancellor has explicitly decided in recent weeks to extend the power over loan to income ratios to the FPC (something which will not be able to enacted directly until probably a year’s time). Two of the big clearing banks have moved ahead of any announcement and decided to restrict their loan to income ratios directly.
The increased speculation that the FPC will move to cool the housing market directly comes against a backdrop where the housing market is itself showing signs of moderating as new lending tests are implemented. Our latest stats show approvals have fallen now for four months in a row since January, new housing supply also seems to be slowing (according to the RICS survey) and activity at the top end of the London market is also slowing. In addition whilst mortgage lending has been picking up, net lending remains modest and the top end of London market is largely driven by international factors (lack of safe assets globally, cash purchases).
All this suggests that the FPC may announce some cosmetic changes which overall may not have a significant aggregate impact but with the MPC now clearly shifting to an earlier move upwards in rates (markets are now expecting a move in November and a number of MPC members have signalled that in recent days); the need for the FPC to act alone is less necessary than it was just a few weeks ago and so I expect them to hold fire on any significant tightening which would impact the housing market directly.