Section 5: Prospects for financial stability

1. Section 5: Prospects for financial stability

2. Chart 5.1 Expectations of UK financial instability diminished further Perceived probability of a high-impact event in the UK financial system(a) Sources: Bank of England Systemic Risk Surveys and Bank calculations. Respondents were asked for the probability of a high-impact event in the UK financial system in the short and medium term. From the 2009 H2 survey onwards, short term was defined as 0–12 months and medium term as 1–3 years. The net percentage balance is calculated by weighting responses as follows: very high (1); high (0.5); medium (0); low (-0.5); and very low (-1). Bars show the contribution of each component to the net percentage balance.

3. Chart 5.2 Real rates have risen but are still historically low in the United Kingdom Forward real yields on UK and US government bonds(a) Sources: Bloomberg and Bank calculations. (a) Five-year real interest rates five years forward, derived from the Bank’s index-linked government liability curves. One-month moving averages.

4. Chart 5.3 Advanced-economy equity prices rose International equity indices(a) Sources: Thomson Reuters Datastream and Bank calculations. (a) Denominated in units of local currency. (b) This corresponds to the lowest value in the S&P 500 across the time period shown.

5. Chart 5.4 Debt levels in advanced economies have risen Debt to GDP ratios of selected advanced economies(a) Sources: Bank of Japan, Eurostat, Federal Reserve Bank of St. Louis, IMF WEO and Bank calculations. Euro-area periphery includes Greece, Ireland, Italy, Portugal and Spain. Core Europe includes Austria, Belgium, Finland, France, Germany and the Netherlands.

6. Chart 5.4 House price momentum appears to be building Annual house price inflation in 2012 and 2013 across the United Kingdom(a) Sources: Halifax, Nationwide and Bank calculations. The stylised maps show the average of the Nationwide and Halifax regional house price series. The 2012 map shows house price inflation between 2011 Q4 and 2012 Q4. The 2013 map shows house price inflation between 2012 Q4 and 2013 Q3, scaled to an annual rate.

7. Chart 5.6 Indicators point to further house price rises in the near term House prices and near-term indicators of house prices Sources: Halifax, Nationwide, Rightmove.co.uk, Royal Institution of Chartered Surveyors (RICS) and Bank calculations. Includes the RICS house prices three months ahead net balance, the RICS new buyer enquiries less instructions to sell net balances, the RICS sales to stock ratio and the Rightmoveindex for asking prices posted on the Rightmove website. All series have been moved forward by three months. The Rightmove index has been seasonally adjusted by Bank staff. (b) Average of Halifax and Nationwide measures. Latest observation is for October 2013.

8. Chart 5.7 Housing is central to UK private sector balance sheets Stylised balance sheets of UK households and banks(a) Sources: Bank of England, ONS and Bank calculations. (a) These balance sheets are highly stylised and exclude, for example, lending and deposits of the public sector and financial corporations. Based on end-2012 data for sterling only, using data on MFIs, which include banks and building societies.

9. Chart 5.8 The proportion of mortgages at higher loan to income ratios has been increasing Flow of new mortgage lending for house purchase by loan to income ratio(a)(b)(c) Sources: Council of Mortgage Lenders, FCA Product Sales Data and Bank calculations. FCA’s Product Sales Data (PSD) are only available from 2005 Q2. Data from 1992 Q2 to 2005 Q1 are from the discontinued Survey of Mortgage Lenders and prior to 1992 Q2 are from the building societies sample of mortgage completions. The three data sources are not directly comparable and the loan to income split is illustrative, based on smaller samples, prior to 2005 Q2. All data include loans to first-time buyers, council/registered social tenants exercising their right to buy and homemovers. The PSD include regulated mortgage contracts only, and therefore exclude other regulated home finance products such as home purchase plans and home reversions, and unregulated products such as second charge lending and buy-to-let mortgages.

10. Chart 5.8 The proportion of mortgages at higher loan to income ratios has been increasing Flow of new mortgage lending for house purchase by loan to income ratio(a)(b)(c) Sources: Council of Mortgage Lenders, FCA Product Sales Data and Bank calculations. FCA’s Product Sales Data (PSD) are only available from 2005 Q2. Data from 1992 Q2 to 2005 Q1 are from the discontinued Survey of Mortgage Lenders and prior to 1992 Q2 are from the building societies sample of mortgage completions. The three data sources are not directly comparable and the loan to income split is illustrative, based on smaller samples, prior to 2005 Q2. All data include loans to first-time buyers, council/registered social tenants exercising their right to buy and homemovers. The PSD include regulated mortgage contracts only, and therefore exclude other regulated home finance products such as home purchase plans and home reversions, and unregulated products such as second charge lending and buy-to-let mortgages.

11. Chart 5.9 Household indebtedness is near historically high levels Household secured debt to income ratios(a)(b)(c)(d) Sources: HM Treasury, ONS and Bank calculations. Income is gross disposable income adjusted for FISIM. Mortgage debt includes loans by UK banks and other non-bank lenders. The two scenario projections assume that the ratio of mortgage debt to gross housing wealth returns to its long-run average. They assume that house prices rise at the upper or lower bound of external forecasts for 2013 and 2014, and beyond that at the average growth rate of whole-economy average weekly earnings over the past ten years. They further assume that the real net capital stock of dwellings grows at its estimated average growth rate over the past ten years of available data. External forecasts are from Forecasts for the UK economy: a comparison of independent forecasts, November 2013, as compiled by HM Treasury. Some pre-1997 ONS data are no longer available from the ONS. In such circumstances, we use Bank of England data originally sourced from the ONS.

12. Chart 5.A Household indebtedness is near historically high levels

13. Chart 5.A Household indebtedness is near historically high levels

14. Chart 5.A Household indebtedness is near historically high levels

15. Box 2: Leverage ratio: high-level considerations

16. Chart A The precise definition of the leverage exposure can result in different leverage ratios UK banks’ aggregate leverage ratios under different definitions(a)(b)(c)(d) Sources: BCBS and Bank calculations. Using figures for exposures and Basel Tier 1 capital as at end-December 2012. Sample consists of ten UK banks and building societies The treatment of securities financing transactions under both the BCBS 2010 and CRV IV definitions involve approximations, as does the treatment of trade finance under CRD IV (d) The US supplementary leverage ratio definition uses US GAAP accounting values.  To arrive at the leverage ratio for the sample of UK banks, an approximation of US GAAP accounting values is applied