LENDERS are underestimating the potential losses that they could incur from defaulting consumer debt in the event of a downturn, the Bank of England has warned.
The Bank’s Financial Policy Committee (FPC) said on Monday that the rapid growth of consumer credit was “a pocket of risk” in an otherwise benign domestic credit environment.
The FPC said that consumer credit is not a material risk to economic growth as it represents only 11 per cent of overall household debt. However, it warned that 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,” it said.
UK banks could take a £30bn hit from consumer credit in a severe downturn, equating to 20 per cent of UK consumer credit loans going into default, it warned.
Concerns surrounding consumer credit are not limited to high street banks. Last month, peer-to-peer platform Zopa highlighted its concerns about the UK’s worsening consumer credit outlook and reduced its exposure to higher-risk loans.
This is not the first time that the Bank of England has issued warnings about consumer debt. In July, Alex Brazier, executive director for financial stability, and a member of the FPC, warned that in economic boom periods, lenders can enter a “spiral of complacency,” making credit cheaper and loosening lending criteria.
The Bank’s financial stability report earlier this year showed that 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”.