Bank of England steps up scrutiny of lenders
The Bank of England is stepping up its scrutiny of banks and other lenders on credit cards, personal loans and car purchases amid fears they are being lulled into a false sense of security by the current economic backdrop.
Threadneedle Street is writing to the firms it regulates after reviewing the consumer credit sector, where lending is growing at 10.3% a year – outpacing the 2.3% rise in household income.
The bank is calling on firms to look at the terms under which they are granting 0% balance transfers on credit cards and the basis on which they are issuing personal loans, and to consider the impact of a fall in value of a car when providing vehicle finance.
Its regulatory arm, the Prudential Regulation Authority, found that while the current pace of growth was not being driven by a relaxation of lending standards, it was concerned that to achieve their future plans they would have to do so.
The PRA said it had found “that the resilience of consumer credit portfolios is reducing, due to the combination of continued growth, lower pricing … And some increased lending into higher-risk segments”.
The statement issued on Tuesday by the Bank followed the announcement last week that lenders would be required to put aside £11.4bn of capital to help prepare for any rise in bad debts from consumer lending.
Providing more information on that decision, the Bank said its financial policy committee (FPC), which looks at risks in the financial system, had recently discussed consumer lending. It said: “Loss rates on consumer credit lending were low at present. The committee discussed the risk that lenders, when assessing potential loss rates, might be placing excessive weight on recent good performance in this sector, given that the current environment was likely to have improved the credit scores of borrowers.”
Lenders had “less capacity to absorb losses, either with income from performing loans or with capital buffers”.
Threadneedle Street said banks were themselves the best way to protect against rising consumer credit. “The FPC agreed that firms remained the first line of defence against these risks. Effective governance at firms should ensure that risks were priced appropriately and benign conditions did not lead to complacency by lenders.”
In addition, the short borrowing periods on loans meant that credit quality could deteriorate rapidly if lending terms were relaxed, the Bank added.
The PRA looks at the consumer finance market from the perspective of the lenders it regulates rather than consider the impact on borrowers, which is the remit of the City regulator, the Financial Conduct Economy, which is scheduled to provide an update on its views later this month.
The PRA regulates 40% of the providers car finance and 80% of the credit card market.
With interest rates at 0.25% since the vote for Brexit, the cost of borrowing for consumers has also come down. Rates on personal loans have fallen to 7% from 11% in 2012. In the credit card market, the average term on zero-balance transfers has more than doubled to nearly 30 months.
Car finance, the fastest growing part of the market, is being driven by the growing popularity of personal contract purchase (PCP) deals which now make up 80% of the market. The Bank said a fall in car prices could lead to a surplus of cars coming on to the market which could mean losses for lenders. Lenders make promises to car buyers about the guaranteed future value (GFC) of their vehicle.
The Bank said, though, that the practices the industry followed before the 2008 crisis were no longer being adopted. Credit card write-offs were 6.5% in 2006 and 2007 – more than double the current rate.
Source: theguardian.com