Bank fears debt too high to cope with a rate hike

Tim Wallace
Follow Tim
HIGH house prices are pushing up families’ debts and mean they could be in danger when interest rates rise, the Bank of England said yesterday.

The minutes of its financial policy committee’s (FPC) latest meeting show the panel of policymakers is worried that further sharp rises in prices will build up risks in banks and building societies.

After the meeting the FPC and the Treasury stopped the Funding for Lending Scheme giving more cheap credit to the housing market, after more than a year of propping up mortgage loans.

The price to income and price to rent ratios are above their long-term averages, the committee said, and other measures of affordability are only at acceptable levels because of super-low interest rates.

“A key consideration for all committee members was the likely ability of households to accommodate the increase in debt servicing costs that would result from a rise in interest rates,” said the minutes.

“In this regard, it was noted that some cohorts of households had particularly elevated debt-to-income ratios. As a result, there was a risk of sharp adjustments to household spending in response to a rise in interest rates.”

The FPC also asked the Bank of England’s prudential regulation authority (PRA) to consider making the biggest banks change the way they report risk weightings of their asset books.

Currently the biggest lenders can use their own calculations to judge how risky their loans are, while smaller banks must use a standardised model.

The FPC believes the individual models may sometimes understate risk, and wants the PRA to prepare an assessment of the impact of making big banks report on a standardised model.