Bank of England bosses concerned banks’ financial stability buffers are not high enough

Members of the Bank of England’s top financial stability body have expressed concerns that UK banks’ capital buffers may not be adequate in the face of riskier lending and increasing dangers to the global financial system.

The Bank’s financial policy committee (FPC) maintained its countercyclical capital buffer (CCyB) at one per cent, but “some members noted considerations that might challenge [its] adequacy”, according to minutes from its meeting a fortnight ago, published today.

Big banks are forced to hold the extra capital to be drawn down in the event of another financial crisis. The FPC, led by Bank governor Mark Carney, overall decided that moderate credit growth in the UK justified leaving the buffer unchanged, but the concerns raised by some on the 12-member committee suggest an upward move will be seriously considered at future meetings.

The FPC said it will consider the effects of shadow bank lending and looser mortgage standards in particular in its next assessment of banks’ resilience in stress tests at the end of this year.

The members warned that “strong risk appetite” since the last bank stress tests could have affected banks’ exposures.

While the last bank stress tests were carried out at the end of last year, the data used referred to balance sheets at the end of 2016. Since then the Eurozone economy has outperformed expectations, while US fiscal stimulus in the form of unfunded tax cuts have added to an air of exuberance in financial markets.

The Bank’s members highlighted risks around “riskier corporate lending” in the non-bank sector, which could leave bank loans at higher risk of default.

Meanwhile, the members added concern over the effects of “looser lending standards” in the mortgage sector, which may have increased the risks of losses.

The warnings over the domestic sector come amid an “increase in global risks” which could dent the value of assets on banks’ balance sheets. “Some members” said they merited an assessment of whether to change banks’ capital buffers, potentially weighing on profitability.