LONDON — The UK’s top banking regulator is warning lenders not to make the same mistakes that led to the 2008 financial crisis.
Sam Woods, CEO of the Bank of England’s Prudential Regulation Authority, said he had seen a potential return “to the punchbowl” in a speech on Monday, highlighting concerns that some banks are loosening their internal controls to create more credit and boost risk.
The PRA has seen “a shift in credit risk appetite as lenders compete with each other to find ways of widening the pool of available borrowers, increasing the size of loans available to them, or reducing the credit premium charged for inherently more risky loans,” Woods said.
Woods gave some of the starkest warnings to lenders since the 2008 crisis, noting that many building societies that attended a similar speech in 2004 were no longer in business because they didn’t listen to the advice given.
“As survivors, societies here today ought to be well aware of the warning signs, but I’m conscious that corporate memories can be shed surprisingly fast,” said Woods.
“I would observe that part of the reason why only 44 societies are attending this conference rather than the 60+ that came to its equivalent in 2004 lies in the fact that many of those societies were unaware of, or failed to control, the risks they were taking.”
The speech fed into growing concerns at the Bank of England that the rapid growth of consumer credit poses a risk to banks if the economy stumbles and affects borrowers’ ability to repay the loans.
Brits borrowed £1.7 billion in May, far higher than the £1.4 billion that forecasters expected would be borrowed, and also well above the £1.438 billion borrowed in April.
“Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. Lenders may be placing undue weight on the recent performance of loans in benign conditions,” the central bank said in June.
More worrying for regulators is the use of complex derivatives and temporary shell companies, known as special purpose vehicles, to hide the amount of risk that lenders are taking.
Woods said that he had seen banks innovate to respond to new rules enacted since the crisis, and while some of it was welcome “some innovation is pure regulatory arbitrage — that is, action taken by firms to reduce specific regulatory requirements without any commensurate reduction in their risk.”
“We have noticed that some institutions are now moving on-balance-sheet financing to off-balance-sheet formats using special purpose vehicles, derivatives, agency structures or collateral swaps,” Woods said.