Mortgage lenders could survive a horror recession

Ryan Bembridge

November 28, 2017

The UK’s seven leading mortgage lenders would be able to cope with a downturn more devastating than the global financial crisis, the Bank of England has concluded.

The Bank ruled that no banks need to take remedial action after they strengthened their balance sheets this year – the first time this has happened since the Bank started stress testing lenders in 2004.

Despite the positives Royal Bank of Scotland and Barclays fared the worst, as the Bank found they would fall below their minimum capital levels in the time of crisis.

The Bank stress tested the UK’s leading mortgage lenders against a situation where both world and UK GDP slumped, the value of the pound plummeted and house prices fell by a third.

Ray Boulger, senior technological manager at John Charcol, said: “This is very positive.

“The stress test is pretty onerous and assumes that three very negative factors all happen.”

Boulger speculated whether the stress test for residential mortgages could be relaxed after the news.

Currently mortgages are stress tested against the revert rate (the rate after the reduced or fixed rate period) plus 3%.

Boulger added: “If banks’ capital is sufficient to support a very negative outturn in the economy the FPC could look at whether the level of stress testing is appropriate.

“Most lenders are having to stress test at 7% and above – the question needs to be asked whether that’s too onerous.

“More people who could otherwise afford to buy a property can’t afford to get a mortgage the size they need, therefore they end up renting.

“There’s a bit of a conflict between government and Bank of England policy.”

UK banks have had to triple the capital held against losses since the global financial crisis.

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