The Bank of England has issued its strongest warning yet about the UK’s ballooning consumer debt, saying Britain’s banks could incur £30bn of losses on their lending on credit cards, personal loans and for car finance if interest rates and unemployment rose sharply.
After assessing the fast growth in the consumer credit market, Threadneedle Street is requiring the banking system to hold an extra £10bn of capital as protection against any future losses after finding that lenders are underestimating their exposure to bad debts in an economic downturn.
Publishing its latest assessment of risks to the financial system, the Bank also spelled out specific concerns about the impact of Brexit on £20tn of derivatives contracts used by companies and financial firms to manage their risks.
The UK’s withdrawal from the EU also raises questions about whether banks will be able to hold consumer data in Britain and the ability of insurance companies to make payments to consumers across the bloc.
The Bank’s financial policy committee (FPC) – set up to look for risks to the financial system in the wake of the 2008 crisis – is requiring more capital to be held after being concerned of a “pocket of risk in the rapid growth of consumer credit”.
It follows a warning in July by Alex Brazier, the Bank’s executive director of financial stability, of a “spiral of complacency” about a consumer credit market that was growing at 10% a year when household income had grown only 1.5%. The Bank had already told lenders to start amassing £11.4bn of extra capital in the next 18 months to protect against the rise in consumer debt.
But it is now requiring them to hold another £10bn of capital after bringing forward stress tests of the UK’s lenders based on hypothetical scenarios of interest rates rising to 4% and unemployment reaching 9.5%. This found they would incur losses of £30bn over three years – about 20% of their consumer lending – and £10bn more than might have been expected after last year’s stress tests when Barclays and Lloyds incurred the largest losses from such lending.