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UK PRA sets out buy-to-let proposals as FPC imposes countercyclical buffer


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UK PRA sets out buy-to-let proposals as FPC imposes countercyclical buffer

TheBank of England saidMarch 29 that its Financial Policy Committee decided March 23 to raise the U.K.countercyclical capital buffer rate to 0.5% from zero percent of risk-weightedassets, effective March 29, 2017.

The PrudentialRegulation Authority, meanwhile, set out proposed standards for buy-to-letmortgage underwriting, aiming to prevent "a marked loosening in buy-to-letunderwriting standards and to curtail inappropriate lending and the potentialfor excessive credit losses."

TheFPC noted its statement in December 2015 that it would expect to set acountercyclical buffer of 1% in a "standard risk environment," whichit considers exists at present. It also said Pillar 2 supervisory capitalbuffers should be reduced, where possible, by the full 0.5% U.K.countercyclical capital buffer, meaning that banks accounting for aboutthree-quarters of the overall stock of U.K. lending will not see overallregulatory capital buffers increase as a result of the countercyclical bufferimposition.

"TheFPC's action will raise the future regulatory capital buffer of some banks,including many smaller banks that have contributed around half of the increasein net lending to the real economy over the past year," it said, addingthat almost all such banks currently carry capital in excess of the 2019 BaselIII requirements and the 0.5% countercyclical buffer.

TheFPC said buy-to-let lending ranks among potential threats to financialstability, and it endorsed the PRA's moves with respect to such business. Italso said it considers risks around the June 23 U.K. referendum on EUmembership to be the most significant near-term domestic risks to financialstability.

ThePRA, meanwhile, proposed that all firms should use an affordability test whenassessing a buy-to-let mortgage contract, comprising an interest coverage ratiotest and/or an income affordability test that would judge a borrower's personalincome to support the mortgage payment. Buy-to-let mortgage holders should alsobe subject to an evaluation of likely future interest rates over at least afive-year horizon from the expected start of a contract, the PRA said, addingthat it would expect firms to have regard to market expectations, as well as aminimum increase of 2 percentage points in buy-to-let mortgage interest rates.

Firmsshould assume a minimum borrower interest rate of 5.5%, it added.

ThePRA also proposed that companies consider the intended purpose of a loan beforeapplying the small and medium-sized enterprise lending support factor, whichallows companies to reduce by about 24% the capital requirement on loans toSMEs on qualifying exposures. The PRA said it does not consider buy-to-letborrowing to fall under the scope of the SME support factor and that it shouldnot be applied "where the purpose of the borrowing is to supportbuy-to-let business."

ThePRA said the buy-to-let market is expected to continue growing after theimplementation of the proposals, although against a baseline scenario withoutthe proposals, cumulative new approvals for buy-to-let mortgages would beexpected to decline by 10% to 20% by the third quarter of 2018.

Responsesto the PRA consultation are due June 29.