Bank of England has voiced concerns over the increasing level of consumer credit in the UK, and has instituted various restrictions on banks regarding capital buffers, mortgage lending requirements and stress testing.
Levels of consumer debt have been rising rapidly, well beyond the rise in income, and bank lending has facilitated it’s growth. Since last April, personal lending has increased by 7% and credit card loans have risen by 9%.
The central bank expressed concerns in its most recent financial stability report that lends have grown used to benign economic conditions, and thus have loosened their lending standards. The Bank of England’s Financial Policy Committee warned that though current risks to the financial system remains low, banks should still remain watchful for shocks that could be caused by economic downturns.
It has asked banks to increase their capital by £11.4 billion over the next 18 months, thus having a greater buffer if an economic downturn causes a shock to occur, and causes borrowers to default on their loans. Furthermore, the Bank has set a sooner date for its stress tests, a series of procedures to ensure lenders are able to withstand more volatile economic conditions when borrowers are unable to repay loans.
The greatest portion of outstanding credit still lies in mortgage loans. Bank of England has begun put pressure on current low interest rates and lax lending restrictions. The bank believes that “lenders may be placing undue weight on the recent performance of loans in benign conditions”. Borrowers of home loans will now have to prove that they are able to manage a repayment rate of 7%, which is 3% higher than their actual rates of repayment. This is to ensure that borrowers will not fall into arrears if future rises in interest rate occur.
Mark Carney, the governor of the Bank of England, also didn’t forget to warn consumers to also consider possible adverse scenarios before borrowing.
Brexit and the amount of uncertainly in the future of the UK economy could have been a contributing factor in the Bank of England’s newfound concern over consumer credit. However, it may also be likely that borrowing and consumer spending will mellow out without much government action in the following months due to consumers’ uncertainty in the economy after the recent election, rising inflation and a slowdown in the property market.