Bank of England concerned by 'spiral of complacency' over consumer lending

Paterniano Del Favero
Luglio 25, 2017

The Bank of England has told banks, credit card companies and vehicle loan providers that they risk fresh action against reckless lending as it warned of a looming "spiral of complacency" about mounting consumer debt.

Alex Brazier, the BoE's executive director for financial stability, said that while lending overall has grown in line with the British economy, outstanding vehicle loans, credit card balances and personal loans have risen by 10 percent, far outpacing rises in income.

'Household debt, like most things that are good in moderation, can be risky in excess, ' he said. "Risky to borrowers, lenders and, most importantly from our perspective, everyone else in the economy", Mr Brazier said.

"Lenders have not entered, but they may be dicing with the spiral of complacency".

In a speech at the University of Liverpool, Alex Brazier, Executive Director of Financial Stability and a member of the Financial Policy Committee, said that lenders think they can "reduce prices and loosen lending criteria" in a period of good economic performance and low loan losses.

Brazier said the bank would accelerate this year's stress test of banks' consumer credit loans. "In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions", Brazier said. "Countries with higher levels of debt can therefore have more vulnerable banks and deeper recessions".

He added that terms and conditions on credit cards and personal loans had become easier.

Brazier highlighted vehicle loans, saying so-called personal contract purchase or PCP from the finance arms of automakers now finance nearly four in five new auto purchases.

He said the number of new cars bought with PCP plans - where the vehicle is effectively leased - had soared from one in five in 2006 to four in five.

Brazier believes that fierce competition for business is showing up in increased lending at higher loan-to-income multiples, with the share of lending at an LTI above 4 increasing to 26% from 19% over the past two years.

"The spiral continues, and borrowers rack up more and more debt", Brazier warned.

He said lenders standards can go from "responsible to reckless very quickly".

Brazier added that the bank had put in place defence measures to strengthen lenders' resilience to losses.

"And to make sure this defence line is kept robust in the face of rapid consumer credit growth, we are accelerating this year's test of banks' consumer credit loans", Brazier said.

"By September we will have assessed whether the rapid growth has created any gap in the line".

"If it has, we'll plug it", said Mr Brazier.

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