62-letter120117

62-letter120117 - BANK OF ENGLAND LONDON EC2R 8AH 12...

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Unformatted text preview: BANK OF ENGLAND LONDON EC2R 8AH 12 January 2012 Andrew Tyrie MP Chairman Treasury Select Committee House of Commons 7 Millbank London SW1P3.TA e^ <*JS~*~<S\ You will recall that in my letter of 10 August I presented a set of simple indicators that might form a useful starting point for our discussions at Treasury Committee hearings on financial stability policy - indeed you included these in your Report on the Accountability of the Bank of England. I attach an update of the table which the Committee might find useful ahead of the hearing on 17 January, to which I have added historical averages of the measures where available, and 2007 values, for comparison with the latest readings. It is important to keep in mind that these indicators can only provide a snapshot, with the more complete picture reflected in the Bank's most recent Financial Stability Report (published on 1 December). I would also like to draw your attention to annex 1 of the discussion paper "Instruments of macroprudential policy", prepared by Bank and FSA staff and published on 20 December 2011, which provides an initial review of possible indicators of systemic risk. Over time, the FPC will develop its own thinking on the appropriate indicators to monitor financial stability. As your Report notes, the range of such indicators used must be flexible and must remain under constant review. With all best wishes. Table of financial stability indicators Average, 1997-2007(1) Simple aggregate leverage ratio of major (2) UK banks '"" 24.5 Average 2007(l) 35.6 (3) Latest value 23.7 (Jun 2011) 20.3 (Jun 2011) Aggregate leverage ratio of major UK banks <4' Household debt to income ratio (5) n/a 33.3 (3) 129% 169% 152% (Q3 2011) 12m growth in lending to UK nonfinancial sector( } UK long term real interest rate (7) 10.7% 11.9% -0.2% (Nov 2011) 2.1% 1.4% 0.1% (Dec 2011) Notes: (1) Unless otherwise stated. (2) Total peer group assets over total peer group equity. There is a discontinuity due to the introduction from 2005 oflFRS accounting standards, which tends to increase reported leverage ratios thereafter. (3) Figure as at 2007 year-end. (4) This is our preferred measure of leverage, but is not available for 1997-2007. It includes only high-quality capital, and adjusts total assets to reflect only those assets which put capital at risk. In addition it allows easier comparison with banks reporting under US accounting standards. It is measured as total peer group assets {adjusted for cash items, tax assets, goodwill and intangibles and with derivatives netted according to US GAAP rules) divided by total peer group capital (including total shareholders' equity adjusted for minority interest, preference shares, goodwill and intangibles). (5) I lousehokls1 gross debt as a percentage of a four-quarter moving sum of their disposable income. (6) UK resident monetary financial institutions' sterling lending to UK households and private non-financial corporates (excluding the effect of securitisations and loan transfers). Average is for September 1998 to 2007. (7) 5 yr real interest rates 5 yrs forward, derived from the Bank's index-linked government liabilities curve. ...
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