It is not surprising that many businesses, and the media, hang on every word that comes out of the Bank of England. It seems that the appetite for news in the mortgage trade press is unsatisfiable and that the daily news machine often contains conflicting analysis of the same outputs.
As an example, two recent Bank outputs resulted in two conflicting headlines, in the same magazine, on the same day. One headline stated “BoE defends affordability tests to limit higher value mortgages” the other stated “BoE hints at potential relaxation of affordability rules”. Headlines such as these suggest inconsistent messaging by the Bank, but a detailed analysis of the outputs confirm that the Bank is, in fact, consistent, robust and targeted in its messaging.
Not surprisingly, central bankers across the globe have taken a more direct and interventionist approach to lender regulation since the financial crisis and these regulators have no intention of returning to the pre-crisis ‘hands off’ approach. For example, the recent bank annual stress test resulted in a clear warning to CEOs of “fast growing firms (FGFs)” as the bank found “Most were overly optimistic about the impact of stress scenarios on their business”, “many did not demonstrate an understanding of stress drivers in their business and were unable to explain their assumptions” and “where FGFs identified management actions to be taken in the event of stress, these tended to be poorly defined and lacking clear trigger points for when action would be taken.” These areas are to be developed further by the Bank at a conference session for Chairmen and NEDs of non-systemic UK Banks and Building Societies later this month.
Against this backdrop we are not surprised that we are being asked to do more when undertaking third party oversight of ‘funding lines’ and mortgage book performance. This doesn’t just mean we are being asked to look at a higher percentage of cases; we are now required to undertake wider observations of the loan book including credit risks and characteristics and combinations of risk features – ‘layering’. Credit risk MI and oversight of layered risk for new business and existing stock will be an ongoing Bank focus – firms (especially FGFs) have been warned!