Brexit and increased risk appetite pose new challenges: PRA's Woods

Speaking at the Building Society Association's Annual Conference, Woods said that the period of post-crisis reforms is drawing to a close.

Going forward, he believes that "Brexit will be a key risk and will, justifiably, warrant supervisory attention", adding that "we must not lose sight of risks as structures and business models change, or as activities move around or adapt".

He added that PRA supervisors also pay close attention to emerging trends and potential future risks – such as a potential “return to the punchbowl”.

Woods observes that net interest margins at building societies are coming under increasing pressure - a function of increased lending competition which is exacerbated when pitted against the mutual pricing strategy many have adopted to protect members in an era of low rates.

Across the wider market, the PRA is observing a shift in credit risk appetite from a few firms as lenders compete with each other to find ways of widening the pool of available borrowers, increasing the size of loans available to them, or reducing the credit premium charged for inherently more risky loans.

Other challenges facing the market, Woods said, include a recent trend in increasing loan terms, where 35 years or more for a mortgage "seems to be increasingly common". He raised concerns that the final instalments may have to be met from post-retirement income.

There is also evidence that some societies are searching for yield by creeping up the risk curve in prime residential mortgages. High LTV lending (over 90%) has increased to 4.5% of new lending in Q4 2016, from 2.8% in Q4 2015.

Woods concluded that "supervisors will continue to keep a close eye on the effects of issues such as these on the viability of business models and future strategy for building societies".