Bank warns on “spiral of complacency” over consumer credit
THE BANK of England has issued fresh warnings about rising consumer and household debt.
Alex Brazier, executive director for financial stability, and a member of the Bank’s Financial Policy Committee, warned that in periods of good economic performance and low loan losses, lenders can enter a “spiral of complacency,” making credit cheaper and loosening lending criteria.
Speaking at the University of Liverpool’s Institute for Risk and Uncertainty, he said in the past year, outstanding car loans, credit card balances and personal loans have increased by 10 per cent, while lenders’ risk assessments on how much capital they need to put aside have dropped.
“Terms and conditions on credit cards and personal loans have become easier, and lenders’ own assessments of how risky these loans are, and which they use to calculate how much capital they need to withstand losses, have fallen,” he said.
“But credit scores of new borrowers are lower than they were two years ago.
“Lenders have been the lucky beneficiaries of the benign way the economy has evolved. 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 warns there is a danger that lenders think the risks of lending are falling, when they are actually growing.
It comes as the Bank recently expressed concerns about the boom in consumer credit by increasing capital that banks must set aside for losses.