action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the uk financial system. the fpc is not authorised to take action that is “ likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the uk economy in the medium or long term ”. the fpc has specific powers of direction over the prudential regulation authority and financial conduct authority and the ability to make recommendations ( including on a ‘ comply or explain ’ basis ) to both authorities. it also has the ability to make recommendations within the bank, to hmt and to any other person, with a view to achieving its statutory objectives. all speeches are available online at www. bankofengland. co. uk / speeches the post - crisis reforms embody the lesson of that : keep up … … with the risks the system faces. and with the shape of the system as it shifts. to keep the system capable of serving in the bad times as well as the good. today – declaring my obvious conflict of interest – i want to look back to consider how, over five years, we ’ ve got the system to a place where it can serve the economy in bad times as well as good. and then i want to look ahead, to the macro trends of brexit, borrowing and the unbundling of banking and the challenges they present to keeping up. looking back, we have largely corrected the fault lines that underlay the crisis. in particular, the banking system has been strengthened. not everyone agreed it should be strengthened so much. but it was obvious that it needed to happen. the economic costs of major banks getting into distress are vast. so they must be able to withstand – and keep lending through – even very severe and rare economic events. that ’ s why we stress test them to economic scenarios more severe than the financial crisis. it ’ s why the largest banks must fund themselves with 10 times more capital than they did before the crisis. and this resilience had a reason. it created the confidence for banks to finally get lending again … it has allowed some turbulence to be withstood too. cast your minds back to july 2016. in the wake of the referendum, markets were pricing in a severe downturn in the uk economy and property markets. financial crises often lead to a long run reduction in gdp, with a persistent decline in output relative to pre - crisis trends. bank estimates based on the impact of

investors after a set of tax changes, and subdued credit demand from new buyers as incomes have been squeezed, has masked the effect of looser credit supply to owner occupiers. mortgage rates have fallen materially relative to bank rate, especially at the riskier end of the lending spectrum ( see chart 2 ). and lenders are now prepared to take a bit more risk. mortgage loan to income ratios are rising. households with high mortgage debt make cutbacks in downturns to keep paying the mortgage. more of these households in an economy typically means deeper recessions ( see chart 3 ). that ’ s why, when it comes to mortgages, the interests of the real economy can be served by guarding against excessive risk taking by lenders. we put in such guards, as insurance, back in 2014. they ’ re centred on a limit on new mortgage lending at more than 4. 5 times the borrower ’ s income and on testing of the affordability of a mortgage to a borrower even if mortgage rates were in the region of 7 %. with lenders now prepared to take more risks, those guards are now working. loan - to - income ratios have increased and are now hitting up against them. the proportion of new owner occupier mortgage loans at loan - to - income ratios just below 4. 5 has almost doubled in the past 5 years. almost a fifth of new mortgages now fall into this bucket ( see chart 4 ). in part because of our guards, households ’ mortgage debt servicing burdens remain very low. only 1. 4 % of households spend 40 % or more of their income servicing their mortgage debts. and even if interest rates were to be at 2 %, that share - at 1. 9 % - would be no more than it has been on average in the past. for example, bunn and rostom ( 2015 ) find evidence that more highly indebted groups of households made larger cuts in spending following the financial crisis. see www. bankofengland. co. uk / working - paper / 2015 / household - debt - and - spending - in - the - uk a loan to income limit, setting out that no more than 15 % of new mortgages can be issued at loan to income ratios of 4. 5 or higher ; and an affordability test, under which lenders consider whether new mortgagors could still afford their mortgage if they switched to the mortgage reversion rate and