BOE's FPC Sees U.K. Domestic Risk Appetite Creeping Back Up

(Bloomberg) -- Banks and companies are starting to regain their appetite for risk in the U.K., the Bank of England said on Friday.

Issuance of junk debt is rising, commercial real estate valuations look stretched and loan-to-income ratios on mortgages are going up as lenders compete more aggressively for market share, the BOE’s Financial Policy Committee noted in a statement on its March 12 meeting.

That’s the main difference between now and the FPC’s last statement from November. The committee maintained that, apart from Brexit, domestic risks are normal and the main threats to the U.K. come from global vulnerabilities.

The central bank said that banks could withstand a disorderly departure from the European Union, and that lenders didn’t need to increase their capital buffers. It kept the countercyclical capital buffer rate at 1 percent and said it will revisit that level at the next meeting in June.

Progress has been made since November in mitigating risks to financial services from Brexit, though there’s still a high risk of disruption to derivatives contracts without more agreements between U.K. and EU authorities, it said.

Cryptocurrenies

The FPC also said the popularity of cryptocurrencies such as Bitcoin doesn’t pose a risk to financial stability. The committee echoed Governor Mark Carney in saying that the BOE sees potential benefits in the technology underlying crypto- assets.

The FPC will ensure cryptocurrencies and their exchanges are held to the same standards as the rest of the system if they become more widely used for payments or as an intended store of value, it said. For example, currently crypto-exchanges do not meet the minimum cybersecurity or transparency standards.

The BOE also said that country’s biggest seven banks will be stress tested the same way this year as in 2017. The scenario envisages a shock bigger than the financial crisis a decade ago, though banks will need to pass tougher capital hurdles to pass. That’s primarily due to new accounting rules that force them to book losses on loans sooner.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net, Stephen Morris in London at smorris39@bloomberg.net.

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Patrick Henry

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