34 Constancio (2014) argues that “It seems unacceptable that macro-prudential authorities would passively watch the development of a bubble in housing prices and other asset prices, comforted by the idea that the banking sector is prepared to weather the storm and that the central bank would deal with the painful aftermath. The crisis showed that the amount of risk endogenously generated by a financial cycle spinning ‘out-of-control’ dwarfs the ‘mopping up’ ability of fiscal and monetary policy due to fiscal capacity limits and the zero lower bound on nominal interest rates. In matters of financial instability, prevention is always better than cure”. 35 The FPC recommendation on the loan-to-income (LTI) flow limit is that the PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at LTI ratios at or greater than 4.5. The FPC recommendation regarding mortgage affordability is that when assessing affordability, mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, Bank Rate were to be 3 percentage points higher than the prevailing rate at origination. For further detail, see for instance Bank of England (2014) for a documentation of the Bank of England’s 2014 housing market measures. 36 See Bank of England (2016).
I am not referring here to any desire to usurp the role of those global agencies which are household names to us, even though we may sometimes feel that their understanding of economics and business in this part of the world could be deepened and the rating process itself made more transparent. They focus mainly on rating internationally traded paper. What this region may need is better arrangements for rating domestic and regional issues. How and by whom this might be effected is for discussion. Plainly, it is essential that the investor community has confidence in the expertise and integrity of rating agencies. A more local focus by established agencies, perhaps operating via joint ventures, might ensure such confidence. If that is achieved, then the broader application of ratings may help expand the investor base, notably to embrace those institutional or individual investors who cannot themselves afford to make credit assessments of every issue but who are favourably disposed towards bond investment in principle. The other initiative in hand is to study the potential for more activity in credit enhancement. In some other centres, notably the United States, there exist insurance or guarantee corporations, typically of triple A status themselves, whose business is to sell their backing to the bond issuance of a lesser name so that the latter will be attractive in the market. There has hitherto been only limited activity of this sort in this region, although there were signs of it building up before the Asian financial crisis struck.