John Aglionby Closed Live blog: Bank of England financial stability report

Mark Carney, the governor of the Bank of England, presented the Financial Policy Committee’s report on how it intends to keep the UK economy on an even keel. Most of the press conference was on what it intends to do about the booming housing market and which of its macro prudential tools it intends to use to cool it.

By John Aglionby and Claer Barrett

Good morning. Mark Carney’s press conference is about to begin. If you want to watch, here’s the link

Here is the FT’s new story on the FPC report, by Chris Giles and Sam Fleming

The Bank of England attempted to slow the growth of house prices and mortgage lending on Thursday with measures designed to stop a future credit boom.

The restrictions on large loans imposed by the bank’s Financial Policy Committee are not currently binding, but seek to prevent lending from taking off as the economy recovers.

The BoE said it expected the effect of the FPC’s actions on the economic recovery and housing market to be “minimal” unless the house prices and mortgage lending grows much faster than it expects.

The BoE’s Financial Stability Report said: “The FPC does not believe that household indebtedness poses an immediate threat to stability. But it has agreed that it is prudent to insure against the risk of a market loosening in underwriting standards and a further significant rise in the number of highly indebted households”.

It expected the maximum impact of the policy under a boom scenario to lower the level of national income by 0.25 per cent. Against this potential cost, the bank said its actions would “reduce macroeconomic volatility and the likelihood and severity of financial instability”.

Two new restrictions were introduced by the BoE. The first, recommended by the International Monetary Fund, puts a limit on the proportion of mortgages a bank can lend with large loans relative to mortgagors’ incomes.

The limit was set to restrict lending at income multiples above 4.5 to no more than 15 per cent of a bank’s new lending for residential home purchases. At present, no bank exceeds this limit and the average level of lending above a 4.5 loan-to-income ratio is only around 11 per cent, so it is not binding on any lending, even in the London housing market.

Loans for remortgages that do not increase the principal are excluded from the limit, helping people who already own and might have been excluded from good mortgage deals, as are loans for buy-to-let properties.

In addition to the loan-to-income limits, which the BoE described as “insurance” against future problems, the bank also said banks must ensure new borrowers would still be able to afford their loans if interest rates rose by 3 percentage points in the first five years of the mortgage loan.

The BoE admitted that this limit is very similar to the existing practices of banks, in which lenders tend to assess whether their customers could afford a mortgage rate of 7 per cent, about 2.5 to 3 percentage points above average standard variable mortgage rates that currently exist in the market.

Carney: “The FPC does not believe that house prices pose an inherent threat to stability”

Carney: FPC is making two recommendations

1) A new affordability test – Borrowers must be able to still afford their mortgages if interest rates rise by 3 percentage points in the first five years of the mortgage period

2) No more than 15 per cent any lender’s mortgages should be more than 4.5 times the borrower’s income

FT economics editor Chris Giles tweets:

And FT regulation correspondent Sam Fleming adds:

Carney: “Monetary policy does not need to be diverted to address a specific issue in a sector” – ie the housing market

By way of background, in May, the FT reported that the second phase of Help to Buy had hardly had an impact in London.

Market update: The pound rose to a day-high of $1.7027 as the report was unveiled. It is now $1.7034

Carney tells people on the cusp of the affordability test who have been approved for a mortgage not to panic too much:

“If yesterday you were approved for a mortgage in a bank or building society, today you would still be approved for that mortgage,”

Carney is asked about the London property market.

“Just under 2/3 of high (ie above 4.5 times income) loan-to-income lending is in the southeast.”

“For every one loan above 4.5 times income a lender has to extend six mortgages at less than 4.5 times to keep the ratio in line”.


“This is action and the right type of action. We putting in place a firebreak on high loan to income lending but we’re not shutting it off entirely. Some of it is appropriate – for example for first time buyers.

“What we’re preventing is a slide in underwriting standards.

“In acting today you can do it in a manner that doesn’t undermine activity or undermine the economy.”

Fast FT’s Robin Wigglesworth writes:
Sterling has firmed up its gains today to trade above the 1.7 mark against the dollar again as the Bank of England governor Mark Carney talks about the need to rein in the growth in UK house prices.
The pound climbed up above the 1.7 mark before Mr Carney started presenting the Bank’s Financial Stability Report – in which he unveiled some measures to curb the frothy property market – and consolidated those gains and added to them once investors started digesting the news.
On the day sterling is now up 0.3 per cent to $1.7031, making it the third best performing major currency in the world today.

Carney: What we see based on current indicators is that we expect momentum in the housing market to continue for the next year or so.
That growth is then expected to slow. “That’s an expectation not a certainty”.

FT Money editor Jonathan Eley questions the political ramifications of Carney’s statement:


“This is the limit of our tolerance. If we need to recalibrate we will.”

Paul Kavanagh of stockbroker Kilick and Co tweets:

FT’s Chris Giles asks about the buy to let market.
Carney says: We are looking at the buy to let market through stress tests.

Andrew Bailey, deputy governor for prudential regulation, adds:

“The buy to let market is the rental market and so the dynamics are different.

“We will also continue our supervisory oversight of the housing market as a whole and that will include the buy to let market.”


“We don’t target housing prices, we care about indebtedness.”

Carney says the 15 per cent cap on banks’ higher ratio mortgages will start to have an impact in a year.

Here is the Treasury’s statement on the new limits on Help to Buy mortgage lending.
It basically ties in with what Carney has announced.

More from Robin Wigglesworth on the FastFT desk:

Here’s the FPC report in full

Carney says there are still tools in the box apart from having to raise interest rates- such as forcing banks to have a stronger capital buffer against their mortgage portfolio.

“The one point I’d make on [raising interest rates]… is that at present… inflation is just getting back to target at the end of the forecast horizon.”

“We have a wide range of tools and a mandate to address these types of risks.”

Carney is asked about being described as an “unreliable boyfriend”: After blushing he says:

“We’re dedicated central bankers, we’re focusing on delivering on our mandates.”

“We’re delivering on our mandates faithfully and consistently”

On possible sanctions against banks that exceed the 15 per cent cap, Andrew Bailey says legal sanctions “are not the first line of attack”. He says he expects institutions to “respond appropriately” to the new rules.

Carney adds: “There’s not a story there, frankly.”

The FT’s Chris Giles tweets a chart showing how loan-to-income caps will have very little effect:

The FT’s Chris Giles is not convinced about the 15% loan to income caps:

Carney is asked about the 15% cap, when it will take effect and the impact on the southeast.
He replies that there is still room to extend loans of greater than 4.5 times income, it’ll just be up to the banks to decide who to extend it to. He says the 15% figure was reached after “long and hard” thinking by the committee but that it could be adjusted. And he says “IF we thought other measures were necessary today we could have done them”.

“It’s a graduated and proportionate response.”

The Council of Mortgage Lending tweets:

Carney is asked again about other tools that the FPC might use. He says:

“We shouldn’t rule anything out… but we have to take judgments about what will be most effective. We will see how things evolve. “

“If lenders make every loan just below the cap then we would respond.”

Carney is asked if banks were warned in advance. He says the PRA would look at the flow of lending over the next quarter, where mortgages that are extended today would fall.
On top of that is the reality that on an institutional basis the vast majority, effectively all, institutions are at or below the cap as they sit today. It would take them to change their behaviour to [go above the cap].”

The FT’s Sam Fleming asks if the 15% cap is by volume or value: Carney says it’s by volume but the Bank will also monitor value to see if there’s behaviour to “game the system”.

That’s the end of the press conference. We’ll post a summary and reaction soon.

Mike Hunter from the FT’s markets desk writes that sterling is holding above the $1.70 mark, but is off its session-high of $1.7035. As the press conference ends, the pound is up 0.2 per cent at $1.7022.

- There will be a new affordability test – borrowers must be able to still afford their mortgages if interest rates rise by 3 percentage points in the first five years of the mortgage period.
- No more than 15 per cent any lender’s mortgages by volume should be more than 4.5 times the borrower’s income.
- The FPC expects the impact of the 15% cap to be felt within a year.
- Carney says the FPC still has many tools in its tool box short of raising interest rates to cool the housing market.
- The FPC will keep an eye on the-buy-to let market
- Supervisors will watch closely to see if lenders try to game the system by extending many mortgages just below the 4.5 times income cap.
- The FPC expects momentum in the housing market to continue for the next year or so.

The government has just announced that its Help to Buy initiative has so far helped 35,000 people onto the property ladder. It claims that house building has risen by a third since the scheme was first launched and that only 6% of Help to Buy transactions were in London.

Here are a couple of charts from the FT’s stats team to show why the BoE feels it’s necessary to act.

We’re wrapping up the live blog now. Thanks for following and continue to read for further reaction and developments