Impact of the BoE Financial Stability Report on banks - Comment from Rob James, OMGI

Rob James, financials analyst, Old Mutual Global Investors

The much anticipated Financial Stability Report was issued today by the Bank of England’s Financial Policy Committee.

Given the amount of comment that has been made over the course of the last few months over the pace of growth of unsecured lending, that is car loans, credit cards and the like, it came as no surprise that the countercyclical capital buffer was reintroduced at a level of 0.5% with a likely increase to 1% later in the year.

This is mainly a symbolic increase: banks are managing their capital levels today with a view to the normal ‘through the cycle’ level of buffer of 1%. Nevertheless, it sends a signal that the authorities are watching the volume and quality of lending very closely, which can be no bad thing. The 2017 stress test will examine the stressed behaviour of consumer lending to inform whether any further action is warranted.

Good news also comes on the Term Funding Scheme, TFS. This scheme offers banks very cheap financing to grow their loan books and offer lower prices to consumers. There had been suggestions that this would end early, but the report does not indicate this, which will bring a sigh of relief from the main users of the scheme, the so called ‘challenger’ banks.

So, overall, nothing untoward in here, with the buffer increase already planned and no withdrawal of TFS. In our view, it is good news for the banking sector.