Tuesday 1 December 2015

Some Actual 'Prudential' Regulation Ahead?

The usual rule of thumb about articles ending in a question-mark is that the answer is 'no'.  (Nice Grauniad example today: "New generation wave energy: could it provide one third of Australia's electricity?")

But let's not be too cycnical.  So now the Bank of England has been conducting another round of stress tests.
The Bank subjected seven major lenders to a hypothetical scenario that involved a dramatic slowdown in the Chinese economy, prolonged deflation, a reduction in interest rates to zero and a huge increase in costs for fines and legal bills of £40bn. The test found that profits would fall more than than they had done during the 2008 banking crisis – by £100bn by the low point of the hypothetical scenario in 2016 - but capital cushions remained strong enough to withstand the downturn while increasing credit to the economy by 10%.
I have long-held reservations about these banking 'stress tests':  they are rarely stressful enough; and technically, stress-tests should involve a scenario that is a shock to the system, not an ongoing pressure like 'prolonged deflation'.  However, doing something like a stress test is better than doing nothing.

The BoE has reached some conclusions, the headline being rather complacent airy: "The stress-test results suggest that the banking system is capitalised to support the real economy in a severe global stress scenario, which adversely affects the United Kingdom".  Well let's hope they are right. 

But there is a line-item detail that may, just may, cause them to act; namely the easy terms on which buy-to-let mortgages are available (once again). 
While it did not take immediate action to cool this sector - where lending has risen 10% in the first nine months of the year - it said it was reviewing the lending criteria adopted by firms and stands “ready to take action.” It will also be watching the impact of the extra 3% stamp duty announced last week by George Osborne in his autumn statement.
This might, then, be an actual British 'counter-cyclical prudential intervention'.   Correct me if I am wrong, but I think that would be a first -  the relatively new-fangled Prudential Regulation Authority hasn't really done anything at all along these lines as far as I know.

Of course, other countries act in this way from time to time as a matter of course, and were doing so before the crisis.  Our 'PRA' is a belated effort to catch up a bit.  Will they or won't they?


No comments: