The Bank of England (BOE) will test the risks associated with sterling dropping by a further 32 percent from today’s level to languish at a low of 85 cents by year-end.
This scenario will form part of the stress tests the central bank is set to run in 2017, the inputs for which were revealed on Monday morning.
The bank’s Financial Policy Committee (FPC) simultaneously announced that a review of consumer credit is to be launched immediately. This review will focus specifically on the credit quality standards being applied to new consumer loans given concerns over the rapid rise in levels of household indebtedness.
“U.K. household indebtedness remains high by historical standards and has begun to rise relative to incomes. This could principally represent a risk to lenders if accompanied by weaker underwriting standards. The FPC judges that these standards should be monitored closely,” read the BOE’s press release.
Unveiling the parameters for both a “cyclical” and an “exploratory” test, the BOE said that while it perceives the overall risk to U.K. financial stability as broadly similar to last year, its assessment of the level of global risks has increased.
The bank specifically highlighted increased global concerns over risks coming from higher U.S. equity valuations and the growing gap between credit and gross domestic product (GDP) in China.
While total domestic risks are considered to be on par with those assessed in 2016, the relative weightings given to the risks have shifted slightly.
