UK banks warned about their consumer loan losses

The Bank of England said rapid gains in consumer credit could cause UK banks to suffer bigger losses than they are expecting if the economy weakens.

“Lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality,” said the Bank of England’s financial policy committee. “As a result, they have been underestimating the losses they could incur in a downturn.”

In the event of a recession, losses from defaults in consumer loans would reach £30bn (€34bn) within three years, the Bank of England’s stress tests showed. It will release complete results of that analysis on November 28.

The Prudential Regulation Authority will set capital requirements for individual banks so potential losses can be absorbed that will total an additional £10bn, (€11.4bn) the FPC said. The statement comes in the wake of multiple warnings from central bank officials about consumer credit, which has surged about 10% in the past year. While some relates to car purchases, borrowers are also being enticed by cheap personal loans and incentives on credit cards.

Consumer credit growth poses more of a risk for banks than for the economy overall, the Bank of England said. Consumer lending accounts for just 11% of the overall household debt in the UK, though defaults on such loans tend to rise faster than others in a downturn, the bank said.

The level of consumer debt relative to incomes is in line with historical averages and defaults have fallen from 5% to 2% in recent years.

To get a handle on potential risks, regulators fast-tracked part of their annual stress tests. That gave the FPC, led by Bank of England governor Mark Carney, new information at their latest meeting to analyse the resilience of banks to a sharp jump in defaults.

The Bank of England reiterated that it plans to raise the so-called countercyclical capital buffer requirements for banks to 1% in November. Its Monetary Policy Committee said this month interest rates may need to rise in the next few months if economic growth turns out as expected.

Bloomberg