3 But the current level is still relatively high by historical and international standards and is something that, in my view, the FPC needs to keep carefully in mind when thinking of financial stability. Hotspots Within this current overall picture of the UK being at the beginning of a period of standard risks, credit growing gently at a similar rate to nominal GDP, and asset prices supported by low long-term interest rates, there are some hotter spots in property markets and elsewhere, such as consumer lending. 4 I will focus on property markets. Buy-to-let First and foremost, within the residential property market, lending for buy-to-let has been growing strongly for a number of years. The stock of buy-to-let mortgage lending has grown at an annual average rate of 6% since 2008. It rose by 11.5% in the year to 2015 Q4, while the stock of lending to owner occupiers was unchanged. Buy-to-let mortgages now account for 17%, by value, of the total stock of secured lending. Lending for buy-to-let has clearly been profitable. At around the start of 2016, lenders were planning to grow their gross buy-to-let lending by, on average, almost 20% per annum over the next two years, with some challenger banks and smaller building societies planning to grow their buy-to-let books at a much faster rate.
Having clarified this point, I can potentially see four main ways of increasing resolution capacity: The first would be to increase the amount of regulatory capital held by CCPs, and explicitly ring-fence a share of this capital as a means to recapitalise a new entity in a resolution scenario. In the EU, CCPs are required to hold sufficient own resources to cover operating costs over a six-month period – this requirement could be strengthened, not only in order to cover for a potential wind-down, but also to meet the funding costs of a new entity. For the reasons described above, I believe there would be important drawbacks in relying only on CCPs to increase their regulatory capital. CCPs should provide a proportional contribution to the resolution process, but should not bear all the costs. A second policy option could be to make use of initial margin haircutting as a means to fund the resolution process and establish a new CCP. While this would provide CCPs with significant resources, mutualised across the entire clearing membership, and could provide a base for re-launching a viable CCP with some degree of certainty over the sharing of losses, it would also imply a significant change in the way clearing members understand their liabilities towards the CCP – indeed, in certain jurisdictions, initial margin currently has to be bankruptcy-remote. It would be difficult to predict the potential pro-cyclical effects resulting from this tool, as well as the effects on incentives for members to take part in central clearing.