You are here: Home - Credit Cards & Loans - News -

Bank of England warns of £30bn consumer credit losses

0
Written by: YourMoney.com
25/09/2017
The Bank of England has raised concerns about Britain's consumer credit bubble and believes banks “have been underestimating the losses they could incur in a downturn” from consumer credit defaults.

It warned that as a result in a severe recession “the UK banking system would, in aggregate, incur UK consumer credit losses of around £30bn, or 20% of UK consumer credit loans”.

Brokers and other industry representatives have been growing increasingly uneasy about the volume of unsecured consumer credit being issued and it appears the Bank of England is starting to recognise these issues.

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.

This is according to the latest notes from the Bank’s Finance Policy Committee (FPC) in which it stated: “Within a benign overall domestic credit environment, there is a pocket of risk in the rapid growth of consumer credit.

“This is not a material risk to economic growth, as consumer credit represents only 11% of overall household debt. It is a risk to banks’ ability to withstand severe economic downturns, because this asset class is disproportionately more likely to default.

“Although the overall credit quality of consumer credit has improved significantly since the financial crisis, the FPC judges that lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality. As a result, they have been underestimating the losses they could incur in a downturn,” it added.

Pocket of risk

The findings arose from stress tests that are regularly carried out by the Bank of England to model the reaction of different scenarios. The worst case scenario incorporated a UK economic downturn that has the unemployment rate rising to 9.5%, and Bank Rate rising to 4%.

The £30bn losses in this stress test comprised impairment rates of around 25% on credit cards, 15% on personal loans and 10% on car finance. These overall credit impairments on consumer credit represent 150 basis points of the aggregate capital ratio of the UK banking system.

Despite this “pocket of risk”, the FPC stated that: “In domestic credit markets, risk-taking is currently judged to be at a standard level overall. Domestic credit has grown broadly in line with nominal GDP over the past two years. Lending spreads on new owner-occupier mortgages are in line with their average since 1997.

“The share of households with mortgage debt-servicing costs exceeding 40% of their income (the percentage beyond which historical evidence suggests that households are materially more likely to experience repayment difficulties) is just 1%. And the aggregate debt-servicing ratio for UK non-financial corporations is below its average since 1999.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Are you a first-time buyer looking for a mortgage?

Look no further, get the help you need by searching for your perfect mortgage

Which ISA is right for you? A round up of the six products available in 2017

From cash to innovative finance to lifetime, here's our guide to the ISA products available to savers this yea...

Guide to buy-to-let tax changes

In late 2015, former Chancellor George Osborne announced a range of  tax measures aimed at landlords, which t...

A guide to switching energy provider

All you need to know about switching from one energy supplier to another.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Five fund tips for a 0.25% interest rate environment

With interest rates stuck at a record low 0.25% and expectations rates could fall to close to zero, here are ...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Investing your money

Alliance Trust Plc gives you smart insight into how to invest your money

Money Tips of the Week

Read previous post:
corbyn
The Labour Party conference: what the proposals mean for your money

Labour emerged with two key proposals at its conference today that could affect your money – credit cards and state...

Close