Asset quality also began to show initial signs of deterioration as would be expected given the fall in property prices and the increased strain put upon the cash flow of the affected companies and their employees. BIS Review 32/2003  1  From mid-May however the operating environment of the banks improved as SARS was brought under control. It would be premature to say that the SARS effect has dissipated entirely. In particular, the full effects on asset quality may take some time to show through. But most of the banks that we have talked to are now saying that the impact of the specific factor of SARS on their results for 2003 is expected to be relatively mild. However, the underlying problems in the economy, which SARS helped to magnify, are still with us. Thus, while the balance sheets of the banks remain strong, the earnings outlook for 2003 remains uncertain; and the banks continue to face a number of challenges. One of these is the state of the property market. The heavy reliance of the banks on property lending is well known: residential mortgage lending, in particular, accounts for 35% of the total domestic loans of the retail banks. Property prices have fallen sharply since the Asian Crisis, and the effect of SARS was to produce a further downward spiral. In the three months from March to May, property prices are estimated to have fallen by 8%.
We believe this benefitted policyholders and left the industry in good shape to weather the recent financial storms of the Great Recession. Those are also desired outcomes that lie at the heart of the Solvency II Directive and so I want to leave you in no doubt that we will implement the Directive in a full and robust manner so as to continue to deliver the level of financial resilience consistent with the safety and soundness of firms and policy-holder protection. Another difference in the UK is that we are anticipating more internal model applications than any other EU country, which is not unexpected given the scale and diversity of the UK industry. This creates an unprecedented challenge for the industry, and for the Bank, in ensuring that models are of a high quality and that they meet the Solvency II requirements. It also creates some logistical challenges which you need to be aware of. If there are a lot of you trying to get approval, and only one of us, don’t expect that you can all present us with your models at the last minute and expect a one-to-one service. If too many firms leave their preparations too late, then we will have to prioritise – if you want to be sure, then get in as early as you can. Naturally, a significant proportion of our work relates to internal model approval, given the complex nature of many models and the detailed requirements of the Solvency II Tests and Standards.