Bank of England warns of economic instability linked to the EU referendum

The Bank of England warned that the EU referendum is a risk to the UK’s economic stability and carries the risk of a credit crunch.

The central bank’s outlook for financial stability worsened since its last report in November.

The “most significant” domestic risks to financial stability were linked to June 23’s vote on leaving the EU.

The BoE said that the referendum on EU membership could increase credit costs and push the value of the sterling down even more.

“Heightened and prolonged uncertainty has the potential to increase the risk premia investors require on a wide range of UK assets, which could lead to a further depreciation of sterling and affect the cost and availability of financing for a broad range of UK borrowers,” the BoE said in a statement from its Financial Policy Committee.

Bank of England in London
The Bank of England will also be offering extra liquidity to banks as part of an effort to ensure markets continue functioning smoothly.

BoE proposes new limits on the amount buy-to-let landlords can borrow.

The Bank’s Financial Policy Committee also announced proposals to limit how much buy-to-led landlords can borrow, ordering lenders to be stricter and tighter on granting landlords a mortgage.

The FPC said it “remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending.”

In 2015 the stock of buy-to-let mortgages rose by 11.5% versus an unchanged amount of lending to owner occupiers.

The new rules proposed by the BoE’s Prudential Regulation Authority could reduce lending to landlords by up to 20% over the next three years.

The PRA said in its Consulation Paper that its proposals were designed to “ensure that firms conduct their buy-to-let business in a prudent manner. They aim to “prevent a marked loosening in buy-to-let underwriting standards and to curtail inappropriate lending and the potential for excessive credit losses.”

The PRA proposes that all firms use an affordability test when assessing a buy-to-let mortgage contract in the form of either an ICR test; and/or an income affordability test.

In addition, firms should give consideration to:

All costs associated with renting out the property where the landlord is responsible for

Any tax liability associated with the property; and

Where personal income is being used to support the rent, the borrower’s income tax,
national insurance payments, credit commitments, committed expenditure, essential
expenditure and living costs.