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Creditfix LB 03-2017

Banks Ordered to Reveal Lending Policies

The Bank of England has ordered high street banks and lenders to supply details of their lending policies to ensure that lending is being carried out responsibly.

The banks have been given only 5 weeks to comply by Bank of England governor Mark Carney, as the consumer credit part of the Bank’s annual stress test for financial institutions has been brought forward by two months due to concerns over consumer debt.

It has been found that the average household now owes around 135 per cent of its income on debt, not including mortgages, and savings have hit a record low at just 1.7 per cent of household wages.

The UK consumer credit boom has seen unsecured debt reach a record ?349 billion in 2016. Credit card lending was up by 9 per cent and personal loans saw a rise of 7 per cent.

One of the largest growth areas has been car loans, up by 15 per cent last year. Around four in five new cars are now obtained through leasing or credit deals.

Another concern to the Bank of England is the wide availability of interest-free credit cards, which the bank feels can often encourage consumers to spend amounts that they cannot afford, encouraged to just pay the minimum as no interest is added.

These cards can have interest-free periods of two years or more. However, when the interest-free period ends customers are likely to find themselves paying up to 20 per cent per year if the debt has not been cleared, putting in place a potential interest time bomb.

The Bank of England said it had fast-tracked the consumer credit stress tests on banks because of its concern about the ?rapid growth? in consumer credit over the last 12 months.

This will look at what would happen to banks and their balance sheets if there was an economic downturn and large numbers of households defaulted on their debts. It could lead to tougher affordability tests or new rules to make banks hold more cash in reserve.

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