Banks told to put aside another £11.4bn amid lending crackdown
The Bank of England has told banks they must put aside another £11.4 billion over the next 18 months amid a lending crackdown, as it warned the economy faces a "wide range" of risks.
The Bank raised fears over surging levels of unsecured consumer borrowing on credit cards and car finance, which is rising by more than 10% a year and outstripping incomes.
It announced plans that will see banks build up their capital buffers by £5.7 billion initially, with aims to instruct them to bolster reserves by another £5.7 billion in November.
In its bi-annual financial stability report, the Bank also said it will tighten affordability tests for mortgage lending, over worries the banking sector has become too reliant on "benign" economic conditions.
It said the Financial Policy Committee (FPC), headed by Bank governor Mark Carney, was continuing to work on contingency planning for a "range of possible outcomes" of Brexit negotiations.
These will help "mitigate the risks to financial stability as the withdrawal process unfolds", it said.
The Bank said measures outlined in the report aim to boost the resilience of the financial sector to the "wide range of risks it faces".
It said the biggest risk was the rapid growth of consumer lending, with car finance having rocketed by around 15% and credit card borrowing by almost 10%.
The Bank added: "Lending conditions in the mortgage market are becoming easier.
"Lenders may be placing undue weight on the recent performance of loans in benign conditions."
It will increase the so-called counter-cyclical buffer for banks from zero to 0.5% and again to 1% in November, if the wider economy remains stable, although banks will have 18 months to meet the increased limit.
This sees it scrap an emergency policy brought in last year after the Brexit vote, when the buffer rate was slashed to zero, allowing banks to release reserves to help ward off the threat of recession.
The economy has since proved surprisingly resilient, although growth slowed sharply to 0.2% in the first quarter.
Other actions outlined by the Bank include plans to bring forward stress testing banks for losses on consumer credit lending, from November to September.
It will also tighten up affordability tests for mortgage lending, ensuring borrowers can meet repayments in the event that interest rates increase to around 7%, or standard variable rates plus 3%.
The moves come after the Bank revealed a growing split among policymakers earlier this month, with three out of the eight members on the Monetary Policy Committee voting for a rise in interest rates to 0.5% due to concerns over soaring inflation.
This marked the biggest dissent since 2011.
The Bank said that while consumer lending is a seventh of the size of the mortgage market, the write-offs can be 10 times larger than with home loans.
Losses on consumer credit are low at the moment, but there are fears that the banking sector is leaving itself exposed as households are being squeezed by Brexit-fuelled inflation.
The Bank warned: "The credit quality of the stock of lending can deteriorate quickly.
"Lenders expect to continue to grow their portfolios this year, at the same time as real household income growth is expected to remain particularly weak."
Brexit remained a focus in the report, with the Bank overseeing lender preparations and contingency planning for the possibility that no trade deal is secured by 2019.
The FPC said it was "focused on scenarios that, even if they may be the least likely to occur, could have the most impact on UK financial stability.
"This includes a scenario in which there is no agreement in place at the point of exit."
"Such scenarios are where contingency planning and preparation will be most valuable," the Bank added.
The report showed that some of the global risks previously highlighted had not come to pass, although the Bank remains concerned over ballooning debt levels in China, which is now 257% of gross domestic product.
Mr Carney said, on unveiling the report, that the emergency policies put in place last year after the Brexit vote - including an interest rate cut to 0.25% - had "worked by supporting domestic demand during a period of heightened uncertainty".
Risks facing the UK financial system are now back at "standard levels", he said, allowing it to ensure banks start building up their reserves once more.
The move might be seen as preparing the way for a further unwinding of the emergency economy-boosting package unleashed last summer, raising the spectre of a possible interest rate rise.
Andy Haldane, the Bank's chief economist, surprised markets last week by signalling that he was poised to hike rates in the second half of the year if growth remains stable.
But this is at odds with Mr Carney, who said in a recent speech that now is "not yet the time" to raise rates amid Brexit uncertainties and as households are suffering from rising inflation and poor wage growth.
Some economists believe rates could rise at the Bank's next meeting in August, although Mr Carney's comments signal that policyholders may wish to hold off as the economy faces the threat of a consumer spending clampdown.
Mr Carney warned lenders against "forgetting the lessons of the past" as the Bank signalled lending requirements becoming lax in some areas.
He said: "In some cases, banks are becoming too model-driven."
As well as tweaking the mortgage affordability test, the Bank is also confirming rules to limit higher-risk mortgage lending to those with small deposits.
But Mr Carney insisted the banking sector was strong, and "significantly" more resilient since the financial crisis.