The majority of buy to let investors in the UK are small landlords; 78% of landlords have only one rental property and the majority of buy-to-let landlords are lower rate taxpayers. It is not in my view at all impossible that sharp movements in prices and a loss of confidence in future capital appreciation, in combination with interest rate increases, could cause a substantial number of buy to let landlords to seek to exit the market. This could put material downward pressure on house prices. Though buy to let investors are very different to owner occupiers, there is in the end only one housing stock and housing market in the UK. So the risk is that they could amplify an adverse shock to the housing market. Rapid growth in any type of debt financed activity should always lead a macroprudential regulator to have a closer look. At present there does not appear to have been a general fall in lending standards. Indeed, a number of lenders have tightened their interest coverage ratio criteria over the last 12 months. But we should in my view at the least be monitoring activity and underwriting standards in this market closely and carefully. Corporate credit In contrast to household lending and the housing market, lending to corporates remains more subdued though it is recovering. Bond issuance has accounted for most of the recent increase in debt.
While we are seeing competition between lenders pushing down on rates, particularly in the mortgage market, we have not yet seen evidence of a general deterioration in underwriting standards. Countercyclical macroprudential policy As we move forward in the credit cycle, I think we will need to consider whether and how risks are building in the financial system and how they should be addressed. This is of course already a regular and important element of the FPC’s discussions. But my guess is that it will become even more so in the next phase of the cycle. With that in mind I want to turn now from the conjunctural assessment of credit in the UK to what may look like a more theoretical question but one that is going to be increasingly important to us – what is the objective and the framework for time-varying macroprudential policy? Here I think one can distinguish a number of different strategies. The first is not to attempt time-varying macroprudential policy at all. The second is to set policy to aim to maintain a constant degree of resilience relative to risk. And the third is to use policy actively to lean against the credit cycle. I want to look at these three approaches for the core and riskiest part of the financial system – leveraged banking – and in particular the use of countercyclical capital buffers for banks. I have some sympathy for the “don’t do it at all” approach.