The Bank of England has said that it believes the consumer credit boom is being pushed by low interest rates, and longer interest-free offers on credit cards.
According to the Bank’s Financial Policy Committee (FPC) these factors, along with increases in loan limits are widely responsible for the fastest rate of expansion in consumer credit since 2005.
The expansion in credit given from dealership car finance was also noted by the FPC to be having a strong effect on the consumer credit rise.
The Committee is particularly worried about how the expanse of this lending could affect banks during a future downturn, as banks account for it by recording income based on estimates of future customer behaviour and repayment. This is felt by the FPC to be uncertain and means that the potential scale of losses for these loans during a financial crisis would outweigh that of mortgage lending.
The FPC commented: ‘The recent rapid growth in consumer credit could principally represent a risk to lenders if accompanied by weaker underwriting standards.’
Following the announcement last Monday from the Financial Conduct Authority that lenders could be forced to waive interest repayments for the most indebted, the FPC have become increasingly concerned about the effects of increasing consumer indebtedness.
The Bank of England’s Prudential Regulation Authority has already launched a review of new lending across credit cards, personal loans, and dealership car finance.
The Financial Policy Committee confirmed that it ‘remained committed to the implementation of robust prudential standards’, and also added that they could keep under review capital requirements for the banks in light of expected changes coming from both global banking standard setters in Basel, and a sweeping accounting change that will take effect next year.