THE BANK of England has expressed concerns about the boom in consumer credit by increasing capital that banks must set aside for losses.
The central bank’s financial stability report showed consumer credit – credit cards, personal loans and motor finance, grew by 10.3 per cent in the 12 months to April 2017, described as “markedly faster than nominal household income growth”.
The report warned that while loss rates on consumer credit were currently low, banks had used lower risk criteria to calculate the capital buffer they needed to set aside for these types of loans.
“The current environment is also likely to have improved the credit scores of borrowers,” it said.
“Other things equal, these developments mean lenders have less capacity to absorb losses, either with income or capital buffers.
“The short maturity of consumer credit means that the credit quality of the stock of lending can deteriorate quickly. Lenders expect to continue to grow their portfolios this year, at the same time as real household income growth is expected to remain particularly weak.”
The Bank’s financial policy committee has raised the counter-cyclical capital buffer rate from zero to 0.5 per cent, which must be complied with from June 2018. Stress tests on consumer lending are also to be brought forward.
“Consumer credit has increased rapidly,” Governor Mark Carney said.
“Lending conditions in the mortgage market are becoming easier and lenders may be placing undue weight on the recent performance of loans in benign conditions.
“There are also potential risks to financial stability associated with the range of possible outcomes and a number of paths to them under Brexit.
“In addition the inconsistency between the valuation of some assets, such as commercial real estate and corporate bonds, and the risks implied by very low long-term interest rates make those assets vulnerable to a re-pricing whether through an increase in long-term interest rates, adjustments to growth expectations, or both.”
But Angus Dent, chief executive of peer-to-peer lender ArchOver, suggested the Bank was sending out mixed messages.
“On the one hand, the governor says that rates should not rise in the short-term and the Bank is continuing with economic stimulus to support growth,” he said.
“On the other hand, the Bank is nuancing this with higher lender criteria.
“Tightening consumer lending will always have an adverse effect on business and British plc won’t be reassured by any of the measures in today’s report.
“It’s an obvious thing to say but consumers buy what business makes. If they buy less then business will suffer. Hearing that customers won’t be able to buy so easily on credit, increases uncertainty and will delay investment decisions and refinancing agreements even further.
“This reflects the wider problem that Britain is facing – there is a lack of consistency plaguing businesses that is driving more uncertainty. And uncertainty ultimately leads to a decrease in investment at a time when we need to be focused on fostering the health of Britain’s businesses.”