* BoE says will be vigilant about rise in UK house prices
* Risk of interest rate spikes "at heart" of FPC monitoring
* UK faces extra house price crash scenario in EU bank tests
* Review of leverage ratio will not set actual figure
* Analysts say FPC tone points to more action on housing
(Adds analysts' comment)
By Huw Jones and David Milliken
LONDON, March 27 The Bank of England urged banks
on Thursday to consider the risk of future spikes in interest
rates when they approve mortgages, and prepared tools to rein in
potentially dangerous lending.
British house prices have risen by around 10 percent over
the past year, and the central bank said mortgages were higher
as a share of home-buyers' income than at any point since 2005,
although other indicators remained weaker than average.
Some commentators argue that parts of Britain's housing
market are already in a bubble and the BoE's Financial Policy
Committee, which monitors risks to the financial system, said it
was keeping a close eye on the sector.
"Given the increasing momentum, the FPC will remain vigilant
to emerging vulnerabilities, will continue to monitor conditions
closely and will take further proportionate and graduated
actions if warranted," the Bank said.
From next month the body that regulates how British banks
lend to consumers, the Financial Conduct Authority, will
introduce tougher home loan underwriting standards.
The BoE said in a report of a quarterly meeting of its risk
watchdog, the Financial Policy Committee, that from June it
hoped to have the power to set the interest rate scenarios that
lenders would have to consider when granting loans.
The central bank also said that when it conducts its part of
European Union-wide stress tests for banks this year, it would
also make them consider the risk of a sharp rise in interest
rates and a big fall in house prices.
JPMorgan bank said it expects stricter mortgage stress tests
for borrowers and lenders as a minimum step by the FPC.
"But a continued rise in transaction levels together with
double-digit house price inflation would probably push the FPC
into taking further steps," JPMorgan said in a research note.
Banks could be forced to hold more capital against mortgages
and there was a "high chance" the FPC will recommend scaling
back the second phase of a government scheme to help homebuyers,
The FPC made no new formal recommendations, but it said that
concern about financial markets' readiness for a rise in
interest rates was "now at the heart of the FPC's risk and
The BoE added that British banks' financial health had
improved since its last report in November but that uncertainty
about the cost of past misconduct had increased.
Banks like Barclays and Royal Bank of Scotland
have been fined millions of pounds for rigging the
London Interbank Offered Rate, or Libor, an interest rate
Lenders are also paying huge sums in compensation for
mis-selling loan insurance and allegations are emerging that
banks have manipulated the foreign exchange market.
Separately, the Bank published its terms of reference for an
assessment of leverage ratios at banks, which it said would
report back in November. However it will not set a numerical
value for a leverage ratio until later.
The FPC is likely to get power in future to raise leverage
ratios at British banks to above international minimum levels.
Under the global accord known as Basel III, banks across the
world must hold capital equivalent to at least 3 percent of
their total assets on a non risk-weighted basis from the start
of 2018. The aim of this so-called leverage ratio is to serve as
a backstop to a bank's core capital buffer, which is based on
Policymakers in Britain, Switzerland and the United States
have put more emphasis on the leverage ratio, saying banks can
too easily game risk-weightings in their core buffers and that a
higher ratio is required. Analysts expect them to set higher
levels than Basel III.
"We expect the UK regulator will eventually settle on a
4-4.5 percent hurdle rate, to be achieved by end-2017. Barclays
looks most at risk," Citi bank said in a research note.
The FPC also said it was minded to require big banks to add
up risks on their books using the same standardised model as
Policymakers have become sceptical about how large lenders
use in-house computer models to tot up risks, a calculation
which determines how much capital they must hold.
The FPC said banks who use in-house models may have to
report figures under the standardised approach as well following
a review due in the first half of next year.
"On a standardized basis we estimate Lloyds would see the
greatest risk-weighted assets inflation," Citi bank said.
Finally, the watchdog said it will set out "concrete and
specific action plans" for banks this year to improve their
resilience to cyber attacks.
(Editing by Catherine Evans and Hugh Lawson)