UK regulators raised the red flag on excessive consumer credit this week, with the Bank of England’s Financial Policy Committee (FPC) warning that if it continues unchecked, it could pose a major risk to the country’s banks.
Credit card debt grew at its fastest pace in 11 years in February, reaching a record high of £67.3bn,
The Telegraph’s Szu Ping Chan reported. Cheaper credit and a lengthening of interest-free periods on card balance transfers have driven this growth, as credit card and loan providers vie for customers. The average interest on an unsecured £10,000 loan fell to 3.66% in February – the lowest it has been since records began in 1995.
The FPC, which monitors risks to financial stability, said this intense competition could see underwriting standards slip, making it more likely that households will default on credit rather than mortgage repayments.
If this were to happen, triggered by a major economic downturn, the committee estimates banks could face losses of around £18.5bn, compared to £11.8bn if householders default on mortgage debt.
This isn’t the first time that the FPC has signalled its concerns about the growth in consumer credit. Last month, it announced a review into lending standards.
This week, it said it would continue to monitor unsecured credit underwriting standards closely, while Chan suggested that policymakers were likely to move to rein in lending to consumers as a result of the FPC’s warnings.
The Telegraph article
Supporting customers in debtThe FCA has also moved to curb the downside of the consumer credit boom, writes
Moneywise’s Adam Williams. It has released proposals to compel credit card providers to offer more support to customers in “persistent debt” – those who have paid more in interest and charges than in credit repayments over an 18-month period.
£67.3bn
The total amount of UK credit card debt reached in February this year
Williams says that around 3.3 million people in the UK have persistent credit card debt and 1.8 million of those have been in debt for three years or more. These customers often end up paying £2.50 for each £1 borrowed.
Under the FCA’s proposals, credit providers would have to work with indebted customers to agree a repayment plan or suspend their credit cards to prevent future spending. For customers in serious debt, firms would have to reduce or cancel charges and interest.
Firms have a chance to respond to the FCA’s proposals before a final policy statement is released later this year.
Moneywise article
Raising interest ratesResearch firm Capital Economics has recently argued that raising interest rates would help to prevent a major credit bubble, while bringing some relief to long-suffering savers who have seen their funds stagnate.
PoundSterling Live’s Gary Howes reported on a Capital Economics note, advocating an interest rate rise. “While the outlook for UK monetary policy is highly uncertain, the economy’s continued resilience suggests that interest rates will rise sooner and more quickly than is generally anticipated,” Howes reported Jonathan Loynes, the firm’s chief economist, as saying.
Contrary to the FPC and FCA stances this week, Capital Economics acknowledged signs of a slowdown in growth – higher inflation has started to curb household spending; a trend that is already hitting the retail sector. The British Retail Consortium
reported a sharp drop in quarterly sales in its February figures.
However, Loynes said low interest rates were designed for a post-2008 and post-Brexit downturn, of which the former had receded and the latter had failed to materialise.
“There is a strong case for removing some of the emergency stimulus,” Loynes said, adding that the firm expected rates to rise in Q2 2018 and climb to 1.25% by the end of 2019.
If that materialises, it should go some way to bringing consumer debt back under control. Hopefully, it won’t be too late by then.
PoundSterling Live article