Banks' complacency lets borrowers rack up debt

GETTYThe Bank of England has issued a fresh warning over families binging on credit

GETTYThe Bank of England has issued a fresh warning over families binging on credit

The Bank of England has told vehicle loan providers and banks they are at the risk of action against reckless lending due to a "spiral of complacency" from lenders on mounting consumer debt.

But now it appears the growth in debt has alarmed the the Bank of England's executive director for Financial Stability.

He said lenders standards can go from "responsible to reckless very quickly".

"Lenders have been the lucky beneficiaries of the benign way the economy has evolved".

He noted nearly four-in-five new vehicle purchases are now financed by personal contract purchase (PCP) plans, compared with just one-in-five in 2006.

Getty Images
Getty Images

"Lenders have not entered, but they may be dicing with the spiral of complacency". Losses to those companies - however painful for them - are much less significant for the wider economy than losses at banks.

He added that developments in mortgage debt had been much less striking than those in consumer debt and vehicle finance, with lending for home loans up by just 3 per cent over the past year.

Lenders can lose none on the contracts if auto prices fall - even if borrowers make all repayments.

And people with high debt levels are more likely to default with exposed banks more likely to cut back lending, said Mr Brazier.

The Bank has already raised concerns over surging levels of unsecured consumer borrowing on credit cards and vehicle finance, which is rising by more than 10% a year and outstripping incomes.

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"The spiral continues and borrowers rack up more and more debt", Brazier said in a speech in Liverpool.

That contrasts with just a 1.5% increase in household incomes.

And the level of consumer debt is no higher relative to incomes than it has been on average in the past 20 years.

However, the defence lines may now be starting to kick in, he said, with consumer credit showing signs of slowing and new vehicle registrations falling.

Alex Brazier, the bank's director for financial stability, said outstanding auto loans, credit card balances and personal loans had increased by 10% over the past year, while household incomes had risen by only 1.5%.

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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.

Households owing high amounts of credit card and loan debt are a risk to themselves and also the banks that have lent to them, according to the institution's financial stability chief.

Brazier highlighted the "defence lines" the Bank has introduced to guard against the "spiral of complacency" by lenders, including pro-active supervision of banks and building societies, regular stress testing, and measures to restrict high loan-to-income mortgage lending. "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 said.

In addition, the Bank had forced lenders to hold more capital in order to make them more resilient to losses on their loans.

Mr Brazier said by September the Bank will have assessed whether the rapid growth in consumer lending "has created any small gap in the line". "If it has, we'll plug it".

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