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Creditfix LB 03-2017

FCA and FCP in Disagreement Over Credit Risk

The Financial Conduct Authority (FCA) and the Bank of England’s Financial Policy Committee (FPC) appear in disagreement over the risk of consumer debt levels in the UK.

The Financial Conduct Authority (FCA) recently warned about risks to the economy from consumer debt levels, and indeed Alex Brazier, who is also a member of the FPC, warned in July about rising debt levels.

However, the Financial Policy Committee of the Bank of England (FPC), whose role it is to monitor financial risks to the UK economy, appears to disagree.

The FPC have stated in a paper ‘in domestic credit markets, risk-taking is currently judged to be at a standard level overall. Domestic credit has grown broadly in line with nominal GDP over the past two years.’

Consumer debt rising in line with GDP put simply means that debt is rising in line with the wealth of the economy, therefore shouldn’t take up more of the economy wealth than is acceptable.

The statement continued: ‘This is not a material risk to economic growth, as consumer credit represents only 11 per cent of overall household debt. It is a risk to banks? ability to withstand severe economic downturns, because this asset class is disproportionately more likely to default.’

Regarding the mortgage market, the Bank of England stated: ‘The share of households with mortgage debt-servicing costs exceeding 40 per cent of their income (the percentage beyond which historical evidence suggests that households are materially more likely to experience repayment difficulties) is just 1 per cent.’

Corporate debt outside the banking sector was also considered by the FPC to be at a level in line with long term averages.

However, the report did voice concerns over commercial property valuations, considering assets to be priced as if record low interest rates will continue, whereas the committee believes that they will soon rise.

There were also concerns expressed about how prepared UK banks are if consumer credit conditions were to worsen considerably.

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