MNI: BOE Sees Tighter Credit Conditions But Banks Resilient

UK household finances are being stretched by higher mortgage rates and increased cost of living but the banks are resilient and the likely rise in the share of UK households facing high debt service ratios looks less steep than feared, the minutes of the Bank of England's March 23 Financial Policy Committee meeting revealed.

The price of credit has risen and there is some evidence of tightening in lending criteria in the wake of bank failure and continuing macro-economic uncertainty, but the FPC's judgement is that banks are well placed to continue to provide the finance required to support the real economy,

The FPC noted that some 2.5 million more owner-occupier mortgagors would face higher interest rates this year, as fixed rate deals end, with the average monthly repayment set to rise by around GBP250 per month. Nevertheless, the proportion of households with stretched finances, those with high mortgage cost-of-living adjusted debt service ratios,, was forecast to rise to just 2.0% of all households, a rise of 110,000 households and less than the BOE had previously projected.

UK house prices have begun to fall and mortgage approvals have dropped sharply but the FPC judged that the "weakening housing market (was) not expected to challenge directly the resilience of the UK banking system."

UK banks have historically large holdings of cash and central bank reserves, with around two-thirds of liquid asset buffers in this form, and the FPC left the counter cylical capital buffer unchanged.

NEW LDI RESILIENCE TEST

The FPC also set out new resilience tests for the liquidity driven investment vehicles which were at the heart of the gilt market meltdown in response to the Autumn mini Budget.

The FPC recommended that The Pensions Regulator should set a minimum level of resilience for LDIs stipulating that they should be able to withstand a yield shock of 250 basis points.

They also recommended pension schemes should stand ready to provide collateral more swiftly to LDIs if need be. The slow response of pension schemes as LDIs faced margin calls, and were forced to sell gilts intensifying the market chaos, was part of the problem in the wake of the mini-Budget.