This includes lending by the major lenders and building societies shown in Chart 2, along with relevant lending by all other firms  9  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  9  Chart 5: The average UK mortgage IRB risk-weight has dropped by one third since 2009 Average UK mortgage Pillar 1 IRB riskweight for major UK lenders 16%  15.1%  14%  13.0% 12%  9.6%  10%  8%  6%  4%  2%  0% 2009  2010  2011  2012  2013  2014  2015  2016  2017  2018  Source: Bank of England Notes: ‘Major UK lenders’ include the large UK banks and Nationwide  Chart 6: The average mortgage IRB risk-weight is lower in the UK than in many other jurisdictions Large UK banks’ average UK mortgage P1 IRB risk-weight compared with EU peers Ireland  Portugal Norway Italy Austria  Germany Spain France Netherlands  Denmark Luxembourg United Kingdom  Belgium Finland Sweden  0%  5%  10%  15%  20%  25%  30%  35%  Source: EBA 2015 transparency exercise  10  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  10  Chart 7: The average mortgage risk-weight in the UK is not an outlier when compared to other benchmarks  Selected benchmarks for UK mortgage Pillar 1 IRB risk-weight 18%  15.4% (higher estimate)  16%  15.0%  14%  13.0% 12.0%  13.6%  12.3%  12% 10%  10.0% (lower estimate)  9.6% 7.4%  8% 6% 4% 2%  0% Average UK mortgage RW of major UK lenders  Implied average UK Implied average UK mortgage RW for mortgage RW at financial sectors’ regulatory confidence maximum UK mortgage level (99.9%) from the losses since 1993 observed UK mortgage loss distribution since 1993  Implied average UK Median RW for EU UK mortgage RW floor Average UK mortgages Average UK mortgage mortgage RW if the countries’ national imposed by the PRA in RW if UK banks used RW if the mortgage IRB house price rise since mortgages in 2018 (EBA 2013-2014 - based on the European average risk weight function the average RW RW by indexed loan to were calibrated with a 2013 would have not transparency exercise) reduce UK mortgage’ observed in other value (based on EBA flat correlation factor of indexed loan to value European countries for benchmarking exercise 20% and not 15% (i.e.

One such area, in which both the Financial Policy Committee and Prudential Regulation Committee have been taking a keen interest, is leveraged lending – in other words lending to highly-indebted companies. We have said a lot about this over the last year so I will confine myself to a brief comment only. That comment is that sometimes horizon-scanning does not require binoculars, because the object of study is already at the front gate. I think it would be very odd if we did not pay close attention to a class of lending which grew globally at a rate of 16% last year, and in which there has been a very significant slide in underwriting standards. Further, much of the lending is being funnelled through banks to a variety of end-investors who may or may not understand what they are getting into. A key determinant of risk in these products is the 4  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  4  leverage, but measuring leverage is difficult. Analysts often adjust leverage measures to remove large one-off costs and account for optimistic future growth in earnings. These so-called ‘add-backs’ have been growing steadily in recent years, so the risk metrics in an analyst’s company report are increasingly likely to contain some heroic (or unrealisable) assumptions. The potential risks to banks here are both direct, and indirect through the impact of corporate indebtedness on the economy. Compared to this, the move up the risk curve of UK lenders in the mortgage market looks rather benign.