Lenders may be dicing with a ‘spiral of complacency’, said Alex Brazier, executive director, financial stability strategy and risk at the Bank of England.
Brazier pointed out that outstanding car loans, credit card balance transfers and personal loans have increased by 10% over the past year, at the same time as household incomes have risen by just 1.5%.
He said: “The spiral continues, and borrowers rack up more and more debt. Lending standards can go from responsible to reckless very quickly. The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing.”
Terms and conditions on credit cards and personal loans have become easier, and lenders’ own assessments of the risks inherent in those loans have fallen. However, credit scores of new borrowers are lower than they were two years ago.
Brazier also said that lenders have been the lucky beneficiaries of the benign way the economy has evolved and may not be taking sufficient account of how more difficult economic conditions could affect borrowers’ ability to repay.
He highlighted in particular the growth of car finance. Personal Contract Purchase (PCP) plans now finance almost four in five new car purchases, having accounted for one in five in 2006. Arrears rates are lower than on other forms of consumer credit, but there may still be risks for the banks and car companies associated with arrears.
He said the Bank of England is therefore putting defence lines into the system to guard against the spiral of complacency by lenders and to protect the wider economy. He said that these defence lines “do not eliminate the risks that borrowers and lenders take on when entering into a loan” but that they “safeguard” everyone else – the wider economy – from collateral damage. “They mean there’s every prospect that we can make the economy a safer place than it has been in the past and that we can stop watching endless repeats of Debt Strikes Back,” he said.
These ‘defence lines’ are likely to involve banks setting aside more capital to protect themselves in the event of future economic shocks, but Brazier said that more details would be available in September, after the Bank had completed its analysis.
The Bank of England’s concerns are supported by recent analysis from MoneySuperMarket’s Smart Search tool from January 2015 – March 2017, which found that more than one in four (28%) wanted to borrow an amount equal to at least half of their annual income. Almost 10% of personal loan enquiries are from people hoping to borrow more than their annual income.