Photographer: Simon Dawson/Bloomberg

Bank of England Worries From Property to Debt May Need Action

Five charts to help you navigate the Financial Stability Report
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Bank of England Governor Mark Carney will reveal on Tuesday just how worried he is about parts of the U.K. financial system. 

While the economy is growing at a healthy pace, members of the BOE's Financial Policy Committee have highlighted pockets of concern, some of which are a result of more than six years of record-low interest rates. Among the issues that have caught their eye are the property market and a potential drought in bond-market liquidity, as well as the fact that unsecured debt is rising at pre-crisis rates.

The FPC, which can deploy tools on everything from curbs on home loans to the cushions banks hold against potential losses, will publish its decisions at 7 a.m. in London. Here are some charts officials might have looked at as they made their assessments:

Buy-to-let lending has accounted for most of the growth in mortgages since 2008, according to the BOE. Carney told lawmakers last week that low rates could lead to "excessive risk taking" in the property market. 

While officials could tighten lending standards, they may judge that recent government changes to the market -- such as a higher tax on purchases ofsecond homes -- are enough for now.

The central bank has already taken some measures for owner-occupiers, but it may highlight how house prices continue to rise faster than incomes:

Other measures of borrowing are showing a sharp increase, including unsecured lending:

One potential source of comfort should be easing emerging-market concerns, after signs of a slowdown in China sparked turbulence in August. In their meeting the following month, FPC officials warned that there was a risk of a "material impact" on U.K. financial stability should the Chinese economy slow more sharply and the turmoil spread. 

For banks, the main news will be whether or not the FPC increases the countercyclical capital buffer. Here's what they said in September:

``It could be argued that the system was moving into a more normal phase of the credit cycle and that should be reflected in the committee’s consideration of the appropriate CCB rate. The committee also noted the possible benefits of moving the CCB in smaller increments, especially when credit growth was not unusually strong and given the likely lags in implementation of any new CCB rate.''

The FPC has previously looked at the gap between the credit-to-GDP ratio and its long-term trend, but it's also noted that's probably not the best metric, since it incorporates the unsustainable pre-crisis peak. There's also that hint above that they may favor getting ahead of the credit cycle.

While action is not definite, measures to curb buy-to-let lending and consumer credit are most likely, according to Citigroup analysts Michael Saunders and Ann O'Kelly. Modest private-sector credit growth means officials may choose to leave the countercyclical capital buffer where it is for now, they say.

Others, including Morgan Stanley, are saying there's a chance that the buffer will be increased. That means Carney is probably going to surprise someone tomorrow.

 

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