For residential lending, the CML says, the proposals are extremely radical, and say they have 'considerable reservations'. Instead of applying an across-the-board 35% risk weighting to lower LTV mortgages, risk weightings would be based on two aspects of the loan: the amount advanced relative to the value of the property (LTV) and the borrower’s debt service coverage (DSC) ratio.
Lending to individuals with low LTV and DSC ratios would attract a low risk weighting, potentially as low as 25% (if the LTV was lower than 40% and the DSC ratio was no higher than 35%).
The CML also said assessing risk on the basis of both LTV and DSC ratios is inappropriate for buy-to-let lending. Lenders already set the LTV at which they are prepared to lend in the sector. And, instead of a DSC ratio, a more applicable test of affordability for buy-to-let lending is the rental coverage test, which lenders already use widely.
One of the main problems, the CML added, is that they do not acknowledge the 'special characteristics' of buy-to-let lending. Buy-to-let loans are instead potentially captured under a broader heading of ‘specialist lending.’ That could mean that the risk weighting on buy-to-let lending rises from its current level of 35% to 120%.
In the buy-to-let sector, CML data also shows that default rates are extremely low. As a result, it believes that no increase in risk weighting can be justified.
Imposing a higher risk weighting 'would have extremely serious consequences', increasing costs for borrowers – whether they are housing associations or buy-to-let investors – as firms are forced to cover higher capital costs. The CML warned that some lenders may even choose to withdraw from these markets altogether due to increasing costs.
The CML says:
"We have significant concerns with the Basel proposals. At a high level, we take issue with the methodology applied. The Basel authorities have presented no evidence to justify the higher risk weightings proposed. Indeed, our data suggests that lower risk weightings could be considered.
"We would also point out that the UK regulatory framework has already undergone significant change in recent years and that reforms to both conduct and macro-prudential regulation have reinforced a system that is now robust enough to prevent the build-up of risk on lenders’ balance sheets.
"Some of the recently introduced regulatory reforms have not yet even worked fully through the system, and some, particularly those introduced as a result of the MRR, should lower both the probability of default and loss given default. We therefore believe that the risk weighting of asset classes does not need to change in the way being proposed.
"We are currently putting the finishing touches to an extensive submission on the Basel proposals, in consultation with members. We are also working alongside other UK trade associations, including the House Builders Federation, to ensure that there is a co-ordinated approach to highlight UK concerns, and with the European Mortgage Federation, so that these views are represented at a European level. And we have highlighted our concerns with the relevant government departments.
"We would hope that the weight of opposition to the proposals will persuade the Basel authorities to re-consider them, and undertake further consultation with the industry. The authors of the Basel documents are due to publish responses later in the year and we hope that UK concerns will be reflected in modifications to the current proposals."
