PRA: Brexit and increased risk appetite pose new challenges

The Deputy Governor for Prudential Regulation and CEO of the PRA, Sam Woods announces the challenges brought by Brexit, a risk threat in appetite and regulatory arbitrage mean that “we are living through a vital moment in supervision”.

Talking at the Building Society Association’s Annual Conference, Woods said that the era of post-crisis reforms is coming to an end.

Woods believes that “Brexit will be a key risk and will, justifiably, warrant supervisory attention”, adding that “we must not lose sight of risks as structures and business models change, or as activities move around or adapt”.

He added that PRA supervisors also give close regard to developing trends and possible future risks – such as a possible “return to the punchbowl.”

Woods notes that net interest margins at building organisations are coming under increasing stress – a function of high lending competition which is heightened when holed against the mutual pricing strategy many have utilised to protect members in a time of low rates.

Across the broader market, the PRA sees a change in credit risk appetite from few organisations as lenders compete to find ways of broadening the pool of available borrowers, raising the size of loans accessible to them, or decreasing the credit premium priced for inherently more risky investments.

Another difficulty facing the exchange, Woods said, include a new trend in rising loan terms, where 35 years or longer for a mortgage “seems to be increasingly common”. He proposed concerns that the final payments may have to be satisfied from post-retirement income.

There is also an indication that some societies are seeking for yield by crawling up the risk curve in prime residential mortgages. High LTV lending of over 90 percent has increased to 4.5 percent of new lending in the fourth quarter of 2016, from 2.8 percent in the last quarter of 2015.

Woods assumed that “supervisors will continue to keep a close eye on the effects of issues such as these on the viability of business models and future strategy for building societies”.