Mark Carney, governor of the Bank of England (BoE), has said the BoE is “comfortable” with banks’ exposure to motor finance, which in his eyes does not pose a risk to financial stability.
Asked by the House of Commons’ Economic Affairs Committee what his view was on the rapid growth in motor finance volumes, Carney said: “It’s something we have looked at, [as we will do with] any sector of financial services that is growing very rapidly.”
However, Carney added that the risk posed to financial stability was more modest compared to other sectors for a number of reasons, including motor finance debt still making up only a small proportion of overall household debt, the nature of PCP deals – with a bigger risk undertaken by the lender than the consumer – and captive finance companies already holding half of the market.
Carney said: “If you [conduct a stress test] and say, we have a recession and the value of the car is worth 20% less than the residual value than was in the contract, it works out to about 6 basis points, total capital being in the order of 16% [of exposure] at present.”
Although Carney said that it was important for regulators like the Financial Conduct Authority to keep an eye on the issue, he added: “From the Bank of England’s perspective, we looked at it, and we are quite comfortable from a financial stability perspective.”
Carney’s view on overall household debt, on the other hand, was more grim. He said that its high level was one of the main risks to the economy, despite individual household finances being in much better shape than pre-crisis.
He said that although consumer credit constituted just 8% of household debt, in stress tests – which Carney admitted involved “brutal” scenarios – they would account for 40% of banks’ losses.
Additionally, on the mortgage market, Carney said although banks were well capitalised against losses, the risk to the wider economy in a turndown would be that borrowers would devolve all their expenditures to mortgage repayment, leaving little left to spend in other areas and exacerbating the economic cycle.
BoE can cope with post-Brexit financial services licences demand
The committee also touched on the issue of how financial services firm will operate in the UK post-Brexit.
Carney said that since Prudential Regulation Authority had been brought under the BoE in 2013, it had been authorising an average of 13 firms a year. However, because of Brexit, the BoE now expected “something on the order of 150 applications” from EEA banks and insurers, plus another 30 to 40 entities that currently relied on the EU’s passporting regime.
“We have the presumption that ultimately we will come to some arrangement with the European authorities that provides a level of supervisory co-operation and information sharing, [allowing] those entities who currently operate through branches here to continue to do so,” Carney said. “That would be in the best interest of how that system operates and those institutions particularly.”
However, should the UK and EU not come to such an arrangement, Carney said it would fall to the BoE to judge which entities need converting from branches to subsidiaries, and all firms would have to go through an assessment process regardless.
In that case, Carney was confident the BoE could handle the workload: “We think we do have the capacity. We have 52 people now working full time, so we have significantly ramped that up, and then we have the full time equivalent of another 30 people, so we have 80, whereas we would have had 25-30 previously.
“The first best situation is that those firms that are ready to seek authorisation – and a number of them have been getting themselves ready – will come in [already], and we’ll be able to space this up.
“Obviously we would benefit from a transition period, but we have the resources, and we have the prospect of a temporary permission regime, which would give us some flexibility.
“In the very unlikely event the transition period isn’t finalised, then we would have to accelerate with the firms’ [applications].”
In December, the BoE opened a consultation on future arrangements for supervising European financial services firms, after reports had emerged that it planned to unilaterally grant them access to the UK market post-Brexit. The consultation closes on February 27.