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Mortgage costs may rise with new BoE regulations

31/10/2014

The Bank of England (BoE) will today announce new regulations for banks to maintain financial safety nets. Industry experts believe this may raise the costs of mortgages and penalise building societies.

The new rules are expected to require “systematically important” banks to have a leverage ratio between 4% and 5%. This means that for every £25 that a bank lends, it must have £1 in reserve in case of a drop in the market. The international watchdog, the Basel Committee on Banking Supervision, have different guidelines than the BoE. They advise banks to have leverage ratios of 3%, which means the BoE expects Britain to go beyond global standards in banking. The leverage ratio is one of the key pillars of regulators’ attempts to strengthen the financial sector in the wake of the financial crisis.

Experts and industry groups are concerned that raising the leverage ratio higher would increase the cost of mortgage repayments and may encourage risky lending. Lloyds, the UK’s largest mortgage lender, said that a tougher leverage rate will have an immediate impact on the pricing of mortgages.

The British Bankers Associations said:
“Tough rules could create perverse effects, such as incentivising banks to increase the cost of new mortgages or even to engage in higher risk lending”.

Building societies will also suffer as the effects of a leverage rise may result in higher lending rates on mortgages in the short term, and increases may be passed onto customers. As building societies are more likely to have mortgages as their main product, this will have a big impact on their business.

In introducing stricter measures than on leverage ratios, the BoE follows in the footsteps of regulators in Switzerland, the US and the Netherlands, which are bringing in ratios of 4pc and above.

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