The Bank of England’s Financial Policy Committee (FPC) has announced a review into the UK’s biggest banks regarding their lending criteria which they are worried may have become less stringent. This announcement comes soon after the FPC’s comments that it is to make lenders draw up comprehensive plans for unpredictable events like Brexit and another financial crisis.
With regards to unsecured lending from banks, new statistics from industry bodies and the Bank show an increase in the number of personal loans taken out and credit card debt levels have risen significantly. Unsecured lending has now hit its fastest rate for 11 years and as a result, the FPC is concerned about the stability of the banks when there has been a surge in household debt.
They are worried this could lead to another debt bubble which may trigger a recession and at the beginning of the year, an FPC member made his concerns known when he described the current situation as a ‘flashing light’.
Since the financial crisis of 2007/08, the Bank has been thoroughly checking debt levels as they found that recessions are longer and much worse if households cannot manage their debts. To prevent a financial crisis the size of the last, the review, to be taken place by Prudential Regulation Authority, will be reviewing lender’s credit quality standards on loans.
Many believe that this rise in borrowing has been assisted by lenders who have been battling to be the best buy for credit cards and loans; the average interest rate has fallen from 10% to 4% on a £10,000 loan over the last 8 years. On top of this, credit limits have been raised and many lenders have lengthened their interest-free periods, specifically for debt transfers.
These interest rate drops and favourable terms have made borrowing on credit cards or through personal loans more affordable despite low wage rises for the typical UK household.
However, debt charities have recently warned that they have seen an increase in calls asking for help from people struggling with their unsecured debt. Debt charity, Stepchange said they had received 600,000 calls relating to debt problems in 2016, 9% up on the previous year.
Due to the risk, unsecured borrowing makes up much less of a bank’s balance sheet than secured lending, such as mortgages, but the Bank of England and other bodies are worried banks may be playing dangerously should affordability in UK households fall or interest rates rise significantly.