Bank of England warns about UK's consumer credit growth

Bank of England warns a consumer debt crisis could cost banks £30bn

Bank of England warns a consumer debt crisis could cost banks £30bn

Britain's banks will have to find another £10 billion to cover potential losses in their portfolios of credit card, personal loan and auto finance debt, the Bank of England has said.

The FPC said it now believes that commercial banks are collectively exposed to potential losses of around £30 billion, representing about 20% of United Kingdom consumer credit loans.

United Kingdom banks have a total stock of consumer credit, which excludes mortgages and student loans, worth around £145bn.

However, the Bank of England also noted that it was happy with current mortgage lending which was in a stable position and broadly comparable to the last 20 years.

"Growth of consumer credit remains well above the rate of growth in household disposable income", the committee said in a report on a meeting held September 20.

The Bank's Financial Policy Committee said: "Lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality". It is a risk to banks' ability to withstand severe economic downturns, because this asset class is disproportionately more likely to default. As a result, the committee said, lenders "have been underestimating the losses they could incur in a downturn". Each bank will be given its buffer in November, when the full stress tests are completed.

The Bank's stress test exercises are meant to measure how United Kingdom lenders would fare in an economic downturn and under hard market conditions.

The loss rate in the 2017 stress test scenario is significantly higher than the loss rate of 13% of consumer loans in the 2016 stress test for major United Kingdom banks.

In turn this would knock 150 basis points from aggregate common equity Tier 1 capital ratio of the United Kingdom banking system. Lending spreads on new owner-occupier mortgages are in line with their average since 1997.

Debt charities have been warning of an intensifying crisis among less-well off borrowers, with many families forced to bprrow to make ends meet. "And the aggregate debt-servicing ratio for United Kingdom non-financial corporations is below its average since 1999".

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