Bank of England warns of complacency over big rise in personal debt

Banks, credit card companies and car loan providers told they face action against reckless lending

The Bank of England has told banks, credit card companies and car loan providers that they risk fresh action against reckless lending as it warned of a looming “spiral of complacency” about mounting consumer debt.

In its toughest warning yet about the possibility of a rerun of the financial crisis that devastated the economy 10 years ago, Threadneedle Street admitted it was alarmed about the increase in the amount of money being borrowed on easy terms over the past year.

“Household debt – like most things that are good in moderation – can be dangerous in excess”, Alex Brazier, the Bank director for financial stability, said in a speech in Liverpool. “Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.”

Brazier’s said there were “classic signs” of lenders thinking the risks were lower following a prolonged period of good economic performance and low losses on loans.

The first signs of the Bank’s anxiety about consumer debt came from its governor, Mark Carney, a month ago, but Brazier’s comments marked a ratcheting up of Threadneedle Street’s rhetoric.

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

The willingness of consumers to take on more debt to fund their spending helped the economy grow strongly in the six months after the EU referendum, a period when the Bank expected growth to fall sharply.

Over the past year, Brazier said, household incomes had grown by just 1.5% but outstanding car loans, credit card balances and personal loans had risen by 10%.

He added that terms and conditions on credit cards and personal loans had become easier. The average advertised length of 0% credit card balance transfers had doubled to close to 30 months, while advertised interest rates on £10,000 personal loans had fallen from 8% to around 3.8%, even though official interest rates had barely changed.

The past decade has seen the number of cars bought with a personal contract purchase (PCP) plan – under which the car is effectively leased – increase from one in five to four in five. Companies risk losing money if used car prices fall and Brazier said banks involved and the shareholders of car companies would “want to think very carefully about the risks”.

He added that developments in mortgage debt had been much less striking than those in consumer debt and car finance, with lending for home loans up by just 3% over the past year. “But even here there are some tentative signs of boundaries being pushed,” he said.

Strong competition for business was resulting in more lending at higher loan-to-income (LTI) multiples, with the share at an LTI above 4 increasing from 19% to 26% over the past two years.

“Lenders have not entered, but they may be dicing with the spiral of complacency,” Brazier said, noting that as credit became cheaper it was taken up more widely and was serviced more easily.

“The spiral continues, and borrowers rack up more and more debt. 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,” Brazier said.

The Bank director said banks and building societies were being supervised and had to prove to the regulator that they had safeguards in place against entering the spiral of complacency. Lenders were also being regularly stress tested to ensure that they could deal with very severe recessions without cutting back on their lending.

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

“By September we will have assessed whether the rapid growth has created any gap in the line. If it has, we’ll plug it,” Brazier said.

Brazier said the defence lines did “not eliminate the risks that borrowers and lenders take on when entering into a loan” but that they “safeguard everyone else – the wider economy – from collateral damage. They mean there’s every prospect that we can make the economy a safer place than it has been in the past and that we can stop watching endless repeats of Debt Strikes Back.”

His speech came just a fortnight before the 10th anniversary of the start of the global financial crisis in August 2007.

“Ten years ago, an unsafe financial system caused financial crisis and economic disaster”, he said. “The western banking system had expanded rapidly. Banks – and their regulators – had been blind to the basic fact that more debt meant greater risk of loss.

“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 much debt made the financial system, and the economy, unsafe. Too many people paid the price when those risks materialised.”


Larry Elliott Economics editor

The GuardianTramp

Related Content

Article image
Rapid rise in personal borrowing is cooling, says Bank of England
Consumer borrowing through credit cards, overdrafts and personal loans slows slightly amid squeeze on living standards

Richard Partington

30, Aug, 2017 @12:18 PM

Article image
UK banks ordered to hold more capital as consumer debt surges
Bank of England brings forward annual stress tests as it grows anxious over lenders’ exposure to consumer credit

Jill Treanor

27, Jun, 2017 @5:19 PM

Article image
What does the Bank of England interest rate rise mean for you?
From mortgages to credit cards, we break down the impact the 4% rise could have on your finances

Zoe Wood

02, Feb, 2023 @2:01 PM

Article image
Bank of England steps up scrutiny of lenders
Threadneedle Street tells credit card and personal loan providers to stick to their terms and conditions

Jill Treanor

04, Jul, 2017 @5:53 PM

Article image
What does the Bank of England interest rate rise mean for you?
From first-time home buyers to credit card users, we look at how your finances may be affected

Rupert Jones and Hilary Osborne

04, Aug, 2022 @12:04 PM

Article image
Bank of England interest rate rise – what it means for borrowers and savers
Rate rise to 3.5% affects everything from mortgages to credit cards, loans and savings. Here is all you need to know

Rupert Jones

15, Dec, 2022 @1:27 PM

Article image
Bank of England sounds new alarm over consumer credit binge
Minutes show Bank is growing concerned at mounting risk to lenders as consumers tap looser borrowing conditions

Katie Allen

04, Apr, 2017 @12:17 PM

Article image
The Guardian view on rising personal debt: more prudence please | Editorial
Editorial: The Prudential Regulatory Authority should use its power to stop credit card companies making it too easy for people to get into debt


05, Apr, 2017 @6:53 PM

Article image
UK credit binge approaching levels not seen since 2008 crash
Debt charities issue warning to government after unsecured consumer credit grew at fastest rate in more than 11 years

Phillip Inman Economics correspondent

04, Jan, 2017 @2:52 PM

Article image
Let's start a revolution - by axing our personal debt | Alex Andreou

Alex Andreou: Debt is a product of and a reason for inequality. But as individuals we can resist easy credit and focus on what we need, not what we want

Alex Andreou

24, Jun, 2014 @10:49 AM