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BoE boss warns he’s watching lenders ‘like a hawk’

The boss of the Bank of England’s Prudential Regulation Authority has warned that regulators should be watching lenders “like a hawk” over fears that banks are offering ever more risky home loans.

Speaking at the Building Societies Association’s 150th birthday conference in London on Friday, PRA chief executive Sam Woods raised concerns about increasing loan-to-income multiples as lenders try to compete against one another in a low-rate environment.

He talked about the significance of the UK housing market as the single biggest loan exposure for banks and building societies as well as the greatest liability for consumers.

He said: “There are a number of areas to which we are paying particularly close attention currently.

“First, as all borrowers and lenders are well aware, we have seen something of a price war in the mortgage market over the last couple of years.

“This may be good news if you are, for instance, a young supervisor in the PRA looking to buy your first property.

“But it is less good news if you are a lender concentrated in mortgages, given the impact on net interest margins.”

He added: “The response of such lenders has been entirely unsurprising: a material move up the risk curve.

“You can see this absolutely clearly in several ways: a dramatic fall in spreads demanded over the risk-free-rate; a marked shift in the high-LTV share of new lending by building societies; and a significant increase in firms’ appetite for higher loan-to-value and higher loan-to-income lending.”

But in the clearest signal yet from the regulator that mortgage lenders should be looking closely at their risk profile to ensure they are not over-stretching themselves, Woods went on to say:

“Now, it may be that these shifts are well within firms’ management capabilities, and they should be well captured by our capital framework.

“But we should be watching them like a hawk.”

Private Finance managing director Simon Checkley says that lenders should not be worried if they have  making risk decisions in line with current regulations and with appropriate capital backing.

But he says: “I think this is a reminder from the Bank of England to make sure that behaviour is kept in check and perhaps it is intended to stop any further [risky lending] in its tracks.”

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