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Warnings issued due to rise in personal debt levels and lender complacency

The Bank of England (BofE) has issued a warning about the rapid rise in personal loans which could become a danger to the UK economy in the near future. Over the past year, credit card balance transfers, outstanding car loans and personal loans have increased by 10% whereas household incomes have only seen a 1.5% rise on average.

This increase in the level of debt for households across the UK has been described by a Bank of England spokesman as “dangerous to borrowers, lenders and, most importantly for our perspective, everyone else in the economy.”

Alex Brazier, financial stability director at BofE spoke at the University of Liverpool’s Institute for Risk and Uncertainty recently and talked about the ‘spiral of complacency’ amongst lenders; “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,”

The BofE has already told banks and lenders to set aside extra money to provide them with protection against bad debts should another financial crash occur. However, Mr Brazier dropped hints that the BofE may force lenders to take further measures against bad debt risks if it thought it was appropriate.

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Lenders have also been warned that they may face fresh action against any reckless lending as the Bank is concerned by the increase in the amount borrowed on relaxed terms over the last year. The six months after the referendum result in particular showcased consumer enthusiasm to take on more debt in order to fund their spending which may have helped the economy but it is likely to come at a cost now inflation is on the rise.

This has been exacerbated by more attractive interest rate terms such as 0% balance transfers for credit cards lasting for around 30 months, interest rates on personal loans falling from 8% to 3.8% for £10,000 borrowed and the increase in personal contract purchase (PCP) agreements for car buying which usually have lower interest rates on the repayments.

As a result, banks and building societies are being monitored and stress-tested to prove that they have the necessary measures in place if the worst does happen. Although the BofE is suggesting these defences will not help lessen the risks on those lending and borrowing, they should protect the wider economy from seeing job losses, company closures and the use of public money to bail out banks.

In his recent speech, Mr Brazier spoke about how the crisis ten years ago has impacted the way banks and regulators act today; “Ten years ago, an unsafe financial system caused financial crisis and economic disaster… Complacency gave way to crisis. Companies and households were unable to refinance their debts. The result was economic disaster. In this country alone, close to a million jobs were lost and more than 100,000 businesses failed…. Too many people paid the price when those risks materialised.”

Governor of the Bank of England, Mark Carney, has previously spoken about the same issues raised in this recent speech to say that although some lenders appear to have forgotten the lessons of the financial crisis, the UK’s financial system is much stronger than it was in 2008/09. Lending and borrowing money has always been a risky business and with rising inflation, stagnant wages and Brexit uncertainty it is clear to see why the Bank of England is preparing for the worst.

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