MNI POLICY BOE Broadbent: Debt Growth, Not Levels, Key To Risk

By David Robinson

     LONDON (MNI) - Bank of England Deputy Governor Ben Broadbent said in a

speech on financial stability that rapid growth of debt, rather than levels of

debt, was a key indicator of financial risk.

     The speech did not address monetary policy and the following are key points

     --Broadbent looked at the evidence of past episodes of debt leading to a

financial shock, and found that debt levels were a poor indicator of trouble

ahead.

     Before the 2007/8 financial crisis the level of mortgage debt was highest

in the Netherlands, with UK levels markedly lower and those in the U.S. lower

still. It was, however, the U.S. that experienced by far and away the most

severe problems.

     "Prior levels of debt were not a good guide to the scale of the subsequent

distress in the mortgage market. What did a little better as an advance warning

signal was the prior growth rate of mortgage debt," Broadbent said.

     --The same pattern, of economic downturn correlating with prior growth

rates of debt rather than levels, was evident in a wide range of countries

included in the BOE research.

     --Also crucial is the structure of debt, rather than absolute levels.

     In the UK the growth in unsecured borrowing in recent years can be almost

fully accounted for by student loans and car finance.

     The government has acknowledged that the bulk of student loans will not be

fully repaid - so the the debt level is notional rather than an indicator of

financial stress.

     --In the UK, Broadbent said that once student loans and car finance were

stripped out, unsecured debt is not ballooning, contrary to some media reports.

     Absent car finance and student loans, unsecured borrowing "hasn't grown

much and is pretty much the same as it was, relative to income, in the

mid-1990s," he said.

     --The lesson that rapid growth in debt is an indicator of future financial

stress suggests that in its regulatory role the BOE  will have to act fast if it

sees debt mounting swiftly.

     Raising banks' capital cyclical capital buffers is one way of protecting

against debt build-up, but it is a slow one.

     "If it's true that swings in credit supply develop relatively rapidly, it

may be necessary to supplement the CCyB with other safeguards," Broadbent said.

     One example of a swift measure to tackle debt build up was the BOE

imposition of restrictions on high loan-to-income mortgages in 2014, and

Broadbent left the door wide open to similar measures if rapid debt build up

occurs again.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$]