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The Knimbies who say No

Financial Stability Report Issue 33, June 2013

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Published today, here's the BoE page where all or part of the report can be accessed, as well as data and tables:

http://www.bankofengland.co.uk/publications/Pages/fsr/2013/fsr33.aspx

the full report can be seen at this link:

http://www.bankofengland.co.uk/publications/Documents/fsr/2013/fsrfull1306.pdf

Here's a passage in relataion to credit conditions in the UK, which will be no surprise to people on this site:

In the United Kingdom, lending growth remained weak.

Annual household lending growth has averaged less than 1%

over the past three years (Chart 1.26). Lending to businesses

has been weaker still, contracting by around 3% per annum

over the same period.

The Bank’s Q1Credit Conditions Survey

(CCS) provided some signs of improvement in UK credit availability. For households,

mortgage availability was reported to have increased in Q1 and

was expected to improve further in Q2. The rise in credit

availability was reported to be a little more marked for

borrowers with loan to value (LTV) ratios above 75%

(Chart 1.27). FLS participants reported that the incentives to

lend created by the Scheme had boosted mortgage market

competition, including for higher LTV products where the falls

in quoted loan rates were most notable. But the loosening in

credit conditions has yet to feed into a sustained pickup in

mortgage approvals.

Plenty of charts and commentary to get stuck into, chart 2.22 shows a precipitous decline in lending to companies, down a third since 2008, back to levels last seen in 2005, due to deleveraging.

The commentary on page 30 regarding Commercial Real Estate firms is quite startling, talk about a house of cards:

The stock of outstanding loans to commercial real estate

(CRE) firms, which account for around 40% of UK banks’

UK corporate loans, has been broadly unchanged since 2008.

To date, write-off rates on CRE loans have been similar to

those on non-CRE loans (Chart 2.25). But previous work by

the microprudential supervisor (at the time, the FSA) indicated

that around a third of British CRE loans by value had received

forbearance. Waivers for breaches of loan to value covenants

were the most common type of forbearance. Other forms of

forbearance, such as payment holidays or maturity extensions,

were also common. In some cases, banks have chosen not to

foreclose on CRE loans due to poor liquidity in the market for

CRE loans and properties, to avoid incurring extra losses.

Commentators describe the CRE market as bifurcated, with a

liquid market for ‘prime’ property and an illiquid market for

‘secondary’ property. Investor demand for prime property

has been strong, particularly from foreign investors. And the

availability of credit for prime CRE has improved, including

from foreign banks and insurers. In turn, the value of prime

CRE properties has risen since 2009 (Chart 2.26). By contrast,

liquidity and credit conditions in secondary CRE markets

remain poor. Recently, there have been tentative

improvements in transaction volumes and credit conditions,

including to purchase some banks’ portfolios of

non-performing CRE loans. But secondary property values

have continued to fall and are 50% below their pre-crisis peak.

Absent a recovery in CRE markets, forbearance cannot reduce

banks’ losses indefinitely. In March, the microprudential

supervisor assessed the losses that might be expected to arise

over the next three years on a range of banks’ most risky

assets, including CRE loans, forborne retail loans and

vulnerable euro-area assets. They concluded that a

conservative valuation of these assets, which included UK CRE

lending, would be around £30 billion less than the balance

sheet valuations of these assets, net of existing provisions, for

the banks included in the FPC’s capital exercise.

and here's some more on UK households, page 31, bearfest:

UK household debt to income ratios have fallen, but remain at

high levels (Chart 2.28). This improvement has resulted

mainly from higher nominal incomes. Nominal levels of debt,

which rose sharply in the lead up to the crisis, have continued

to rise (Chart 2.21).

Annual write-off rates on UK mortgages remain significantly

below those seen in the early 1990s and fell further in 2012.

These modest loss rates are likely partially to reflect low

interest rates which, as well as increasing the affordability of

oans for existing borrowers, reduce the cost to banks of

forbearing on loans. A study by the FSA found that 5% to 8%

of UK mortgages by value were subject to forbearance in 2012,

which was broadly unchanged from 2011.

...and may be vulnerable to further distress.

----------------------------------------------------------------

The distributional pattern of UK household debt is again

revealing. A significant cohort of UK households has high

income gearing. The 2012 household survey carried out for the

Bank by NMG Consulting indicated that 18% of secured loans

were to households with less than £200 of income remaining

per month after housing costs and essential expenditure

(Chart 2.29). Loans made to these households might quickly

become distressed if disposable incomes were to fall, for

example, during a period of low wage growth or

unemployment, or if interest rates increased.

A rise in interest rates, without a strengthening in income,

could significantly increase borrower distress and losses to

banks. One indication is that households accounting for 9% of

mortgage debt would need to take some kind of action — such

as cut essential spending, earn more income (for example, by

working longer hours), or change mortgage — in order to

afford their debt payments if interest rates were to rise by just

1 percentage point (Chart 2.30). This would rise to 20% of

mortgage debt if interest rates were to rise by 2 percentage

points. Provided borrowers are able to take actions in order to

afford their debt payments, then this may not lead to

significantly higher losses for banks.

New mortgages to UK households made recently may also be

vulnerable to a normalisation of interest rates. For example,

while new mortgage borrowers in 2012 typically had lower

income gearing than new mortgages borrowers in 2007, their

income gearing would be broadly similar if mortgage rates

were as little as 2 percentage points higher, assuming all other

factors remained equal (Chart 2.31). This might be mitigated

to the extent that mortgage rates are fixed. But while the

share of new mortgages originated with fixed rates is higher

than at any time since at least 2004, the share of mortgages

with fixed rates in the overall stock is close to a historical low.

Plenty of charts in there, 2.30 suggests that a third of UK mortgage debt would suffer from impaired repayments if rates rose by 3%..

It is possible that new borrowers may not fully appreciate the

risks from a normalisation of interest rates. For example, in

the United Kingdom there are signs of new mortgage lending

at multiples of household income that may fail to account

prudently for an increase in interest rates (Chart 3.4). The

repayment burden of mortgages advanced in 2012 was

typically lower than for those made in 2007, when

underwriting standards were at their weakest. But, as noted in

Section 2, it would be similar if mortgage rates were to rise by

as little as 2 percentage points. The FCA’sMortgage Market

Review, which will be introduced in April 2014, requires banks’

affordability assessments to take into consideration any

projected increase in interest rates over the next five years. If

interest rates were to rise more quickly than indicated by

financial market prices, that may not be captured by the

affordability assessment rules.

Where's that picture of Sherlock..?

I've not nearly read it yet, but it is well worth a look.

Edited by cheeznbreed

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Sherlock Homes?

the sign of the four....percent

There are lots of good charts in there, one which caught my eye is 3.19 "Systemic Risk Survey: key risks to the UK financial system" on p50

'Property price falls' is now close to being overtaken by "low interest rate environment" as a key risk to the UK financial system, and is close to being the least important risk to the system.

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There are lots of good charts in there, one which caught my eye is 3.19 "Systemic Risk Survey: key risks to the UK financial system" on p50

'Property price falls' is now close to being overtaken by "low interest rate environment" as a key risk to the UK financial system, and is close to being the least important risk to the system.

Key risk is like a key worker?

Id sum the report up in one word.

overborrowed.

Of course, burying reality in a huge report that few will read, specially those in power who already know the position, sooths the populace into a false sense of security...ie, THEY are looking after us..

Actually, THEY are looking after themselves.

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'Property price falls' is now close to being overtaken by "low interest rate environment" as a key risk to the UK financial system, and is close to being the least important risk to the system.

Struggled to find an appropriate thread on which to link to this article. Associated to cheeznbreed's data, UK, but also wider EU themed.

http://www.reuters.com/article/2013/07/16/us-europe-banks-interest-rates-analysis-idUSBRE96F0PW20130716

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Struggled to find an appropriate thread on which to link to this article. Associated to cheeznbreed's data, UK, but also wider EU themed.

http://www.reuters.com/article/2013/07/16/us-europe-banks-interest-rates-analysis-idUSBRE96F0PW20130716

Good spot, the author mentions the BoE's recognition of the risk factor surrounding a ZIRP.

Few people win with a ZIRP, and it's interesting to see banks themselves saying that their spreads are compressed too. Whether that means rates are going anywhere anytime soon, I am personally very sceptical of that view but other posters like thecrashingisles might read something which chimes with their considered view on rates.

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Good spot, the author mentions the BoE's recognition of the risk factor surrounding a ZIRP.

Few people win with a ZIRP, and it's interesting to see banks themselves saying that their spreads are compressed too. Whether that means rates are going anywhere anytime soon, I am personally very sceptical of that view but other posters like thecrashingisles might read something which chimes with their considered view on rates.

Talk is one thing, Walk and talk is another... Don't be deceived the one thing here is if US do raise rates then other economies may have to react to it.

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interesting video I think

The presenter looked like he was also a throwback from 1994 or maybe 1984. (Sorry James, Investment Editor).

So the conclusion drawn is when US tapers from QE3 constant, its circa $85 billion bond buying per month, in the UK it will be everything still thrown to protect the HPI, and the over-indebted kept in comfortable position, and trash the pound and savers?

If the bond markets persist in tracking US yields higher the central banks are likely to take more action........ This means that higher long term yield could be bad for the pound and the euro, prompting further efforts by the central banks to keep short term rates low.

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The presenter looked like he was also a throwback from 1994 or maybe 1984. (Sorry James, Investment Editor).

So the conclusion drawn is when US tapers from QE3 constant, its circa $85 billion bond buying per month, in the UK it will be everything still thrown to protect the HPI, and the over-indebted kept in comfortable position, and trash the pound and savers?

I think the Yen Carry trade from 199x to 2007 would indicate what would happen if such interest rate differential occurred (UK:plus a high inflation, weak economy plus smaller currency sensitive export sector).

Gorge may come up with mortgage interest deduction, buy now pay latter or that sort of things...who knows...it is now politics rather then economic

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  • 238 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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