MMR: Tougher capital rules for non-banks
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The Financial Services Authority is to impose tougher capital requirements on non-banks under proposals in the final consultation paper of the Mortgage Market Review.
It is suggesting non-banks adhere to a more risk-based capital requirements regime that brings them more in line with banks and building societies.
It is also proposing restrictions that would increase the quality of non-banks’ capital.
The regulator says at least 20% of non-banks’ capital must be in the form of share capital and reserves less intangible assets.
The new requirements will apply to assets arising from all lending, including unregulated loans such as buy-to-let, but they will only apply to loans entered into after the implementation of the rules and not retrospectively.
Meanwhile, the MMR paper also examines the impact of Basel III reforms on lending standards.
It says the Basel III requirements are likely to reduce banks’ riskier mortgage lending to some extent as they will increase costs and reduce lending volumes.
But it says that any reduction in risk brought about by banks’ re-pricing of loans will not necessarily reduce the risk of consumer detriment, and therefore the additional reforms of the MMR are needed to mitigate the danger of consumer detriment in a boom period.
The MMR says: “The decline in mortgage credit availability over the past couple of years has not been driven directly by prudential reforms under Basel III but rather by changes in banks’ risk appetite.
“It remains possible that, in a future period of robustly rising UK house prices, that risk appetite might change again. In other words, banks could meet the Basel III provisions, including holding more and better quality capital, and still run unacceptable risk to customers in the form of the risky mortgage loans seen in the past.”
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