UK lenders question calls for more capital

In a submission, the trade body argues that the new international rules proposed by the Basel Committee on Banking Supervision (BCBS) for assessing credit risk do not reflect the real underlying risk of those assets and would result in “unduly harsh capital treatment” of both prime residential and buy-to-let (investor) mortgages in the UK.

The Basel Committee released its second consultative document on Revisions to the Standardised Approach to credit risk in December last year. The paper also has implications for Australian mortgage providers, as outlined by CoreLogic RP Data’s Craig Mackenzie earlier this year. 

The Basel Committee’s deadline for feedback on the proposals was 11 March. 

In its submission, the UK’s Council of Mortgage Lenders argues that significant increases in risk weightings proposed by the Basel Committee for both prime residential and buy-to-let lending are not justified by historic losses.

“We therefore question the way in which risk weightings have been calibrated,” it said.

“In current market conditions, mortgage funding is available and attractively priced, and UK consumers are enjoying some of the lowest rates ever. But capital requirements that are excessive relative to the risk of the underlying assets are likely to affect the cost and availability of mortgages.”

The Council argued that, if implemented in their current form, the changes would have “unintended and negative consequences” for prime residential and buy-to-let markets.

“Our submission also says that the proposals fail to make sufficient allowance for the way in which mortgage regulation has already been reinforced in the UK,” it said.

“Now that we have stress testing of mortgage affordability by the Financial Conduct Authority, for example, we believe that the BCBS places too much emphasis on historic loss data in its proposals for calculating risk weightings.”

The submission stated that without taking into account the effects of reinforcing UK regulation, the changes proposed by the BCBS are being presented in a “regulatory vacuum”.

While the UK home lending market may seem irrelevant to some Australian mortgage professionals, it is worth noting that local regulators often look to offshore markets when considering supervisory measures.

In a speech at the Macquarie University Financial Risk Day in Sydney on Friday, APRA general manager Heidi Richards noted that the regulator has started collecting loan-to-income (LTI) breakdowns as part of its supervisory measures on mortgage lending.

“Although it is difficult to compare LTI levels across countries given differentials in tax rates and other aspects of the calculation, it is noteworthy that some countries have begun placing restrictions on lending at higher LTI levels,” Ms Richards said.

“For example, the Bank of England recently imposed a limit on the share of mortgage loans above 4.5 times income,” she said.

“APRA supervisors will continue to monitor the trend in higher LTI lending closely, and are encouraging ADIs to use loan-to-income type metrics in their own internal risk management.”

[Related: Analysis: Lending curbs around the world]