The Prudential Regulation Authority has noticed lenders going up the risk curve and should watch them ‘like a hawk’, its chief executive Sam Woods warned.
He added that ring fencing rules, separating lenders’ investment arms from their banking activities, has intensified pressure on the mortgage market.
Woods said: “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.
“The response of such lenders has been entirely unsurprising – a material move up the risk curve.”
This move up the risk curve is clear owing to a number of factors, he added, including a shift towards high loan-to-value and high loan-to-income lending.
Woods added: “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.”