U.K. Credit Binge May Spur BOE's Carney to Curb Exuberance

  • Governor Carney presents Financial Stability Report on Tuesday
  • Bank may start reining in stimulus added after Brexit vote

BOE's Carney Says Not Yet Time to Raise Rates

What a difference a year makes.

Twelve months ago, Mark Carney reassured a nation going into political paralysis following the Brexit vote that the Bank of England stood ready to flood the financial system with cash.

This week, the governor will re-examine whether it’s time to start taking back some of that bank support following rapid growth in consumer credit, a first step toward normalizing policy in the U.K.

As Carney prepares to deliver his biannual assessment of U.K. financial stability, he could force Britain’s biggest banks to raise the levels of capital they employ. Any increase would reverse actions taken in the immediate aftermath of Britons’ decision to leave the European Union, after which the BOE pumped liquidity into the banking system and announced a package of emergency measures to support growth.

“It is time for them to start removing some of the stimulus they put in on the macroprudential side,” said Philip Rush, chief economist at Heteronomics in London. “After the referendum, there were some signs of panic, but the consumer shrugged it off. Most metrics are suggesting things are back to normal.”

The BOE’s Financial Policy Committee -- set up after the 2008 crisis -- met last week and is scheduled to release its report on Tuesday. The governor will give a press conference, where questions about Brexit will probably dominate.

With consumer lending growing at an annual 10 percent pace amid hot competition among banks to sell credit cards and personal loans, U.K. regulators are reviewing lending standards. Consumer credit growth was 5.1 percent in May compared with 6.4 percent in the previous month, as Britons spent less ahead of the U.K. general election, the British Bankers’ Association said Monday.

There was about 90.2 billion-pounds of credit card debt, overdrafts and personal loans outstanding at the end of May, the BBA data show. That compares to 837.8 billion pounds of mortgage loans.

Capital Buffer

The pace of borrowing and level of debt may spur the the FPC to revisit its decision to lower the so-called countercyclical capital buffer on banks’ U.K. exposures to zero taken after the referendum. Officials, who reassessed the level at this month’s meeting, have previously said they prefer it at 1 percent in normal times and that any changes would come into effect with a 12 month lag.

That level “was the path they were on prior to the referendum vote,” said Claire Kane, an analyst at Credit Suisse in London. She, along with Rush, predicts an increase to a 0.5 percent buffer on Tuesday and said the BOE “may work to moderate and to stem the growth in credit, particularly consumer credit.”

Questions may also be asked about the BOE’s Term Funding Scheme, a tool implemented by the Monetary Policy Committee, and whether drawdowns should be extended past the current February deadline. Analysts at Bank of America Merrill Lynch including Alastair Ryan and Michael Helsby have warned the program has helped cause excessive competition among banks.

These exceptional levels of monetary assistance to the U.K. economy have helped boost lending with about 106 billion pounds ($135 billion) in cheap term liquidity from the TFS and its predecessor, the Funding for Lending Scheme, according to analysts at UBS Group AG led by Jason Napier.

Removing that support would cut the supply of credit to the U.K. economy and reduce the risk of a bubble, should the BOE feel the nation can handle tighter conditions. Banks may increase lending rates to protect profit margins in response to a higher cost of funding.

“We, and I am sure all of the challengers, are planning for the TFS to finish next February,” Paragon Group Chief Executive Officer Nigel Terrington said by email. The rate banks pay depositors could increase as a consequence, although lending rates will probably be raised to maintain profitability margins, he added.

— With assistance by Fergal O'Brien

(Updates with BBA lending data in seventh paragraph.)
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