Bank of England warning on Debt

We do have a view on this yes. The difficulty the bank faces is that they can't really raise base rates generally to reduce credit demand yet some parts of the economy, more and more over time, are overheating somewhat. So the bank many years ago suggested it would take a tactical approach rather than use the blunt tool of base rates. Hence (joint with Government) attacks on BTL, somewhat overdone in my view, the recent warnings that a crackdown is coming in consumer debt, much needed in our view, regulatory driven downward pressures on riskier mortgage lending, high PRA capital requirements for SME lending to ensure it doesnt get priced in high volume like consumer debt at 3% etc etc. These tactics will get widened in our view before we see any measurable base rate increases and yet they will have a cooling effect on new lending in sectors that are overheating as a result of low base rates in a similar way to raising rates but without causing over indebted borrowers who have overdosed on cheap loans then going bust through rate rises - consumers or businesses.

In essence this means that perhaps using interest rates as the way to control credit flow and hence inflation  is perhaps very last-millennium. Tactical control credit creation (and let's face it banks do 90%+ of that in the UK) by regulation and legislation is one of the new ways they intend to control inflation I suspect. 

So base rates are likely to stay low for a long/very long time still, they can't be raised much because people have got used to the new low and raising them would bust people/ businesses, QE just left to naturally expire over the medium term rather than short term bond sales and of course the next cycle timing being pushed back and back (and possibly skipping a whole cycle) by low base rates and tactical rather than blunt measures - this is the new paradigm this time around I feel.

Does this mean no risk ? Not at all. The opposite as indeed the bank suggests given the overheating in more than a few sectors is now being reined back in a little. So we remain even more cautious on London and the SE from a house price security perspective (some lenders are 80%+ exposed to this geography), we are mindful of residential development needing to ideally have yield support if the music stops for a bit (meaning rents should ideally pay the loan coupon during a potential pause in the housing sales market), we remain cautious on trading businesses' ability to pay their interest and capital repayments, we continue to move up the credit quality curve to weather a potential difficult period better (and as a result you have seen some reduction in lender loan interest rates as a consequence of this caution and an increasing focus on better quality borrowers) and other tactics and strategies that we won't go into here.

Our provision fund has always been predicated on future worst case stress test BOE scenarios rather than assuming these current top of cycle benign conditions continue. This is aimed to have a substantial 3x loss coverage in today's conditions, not just 1x as some aim to provide, as we are in benign conditions and we intend to still ideally cover all loan losses in the worst BOE projections. This is a statistical analysis of course and things can conspire to frustrate the best laid plans but we consider ourselves to be at the more cautious / sensible end of the spectrum and intend to remain so.

Hope this helps.