Britain’s biggest banks are braced for new restrictions on consumer lending as the Bank of England prepares to unveil the results of its review of the booming sector.
Credit cards, unsecured loans and car finance deals have all surged in popularity over the past year, leading Mark Carney and his colleagues on the powerful Financial Policy Committee (FPC) to investigate if there are any growing risks in the sector.
The Bank is today expected to provide an indication of its analysis of consumer credit risks across the sector.
Officials want to ensure banks are considering borrowers’ ability to repay the loans should the economy slow down, and not just look at repayment rates in the recent benign economic conditions.
Tougher tests could slow the pace of lending growth. Banks may also end up holding more capital against these loans to make sure they are prepared for any fall in repayments.
Lending has grown at a rate of more than 10pc per year and so banks were ordered to carry out a stress test of their consumer loan books.
That is usually carried out across big banks’ entire operations towards the end of the year, but officials brought this section forward to this month, in a sign of the urgency with which the consumer debt boom is viewed within the Bank of England.
Indications have already emerged that banks may be tightening up lending criteria, possibly in response to Bank of England statements on the topic earlier this year. Back in April the Bank noted that consumer loans could be expected to suffer much higher losses than mortgage loans in an economic slowdown.
Borrowers are also much more likely to find ways to pay their mortgage when times get tough, and less likely to pay their credit card bills. However some of the most rapid growth has come in car finance and few banks have big operations in this business.
Instead most of the recent growth has come from car manufacturers’ own finance arms making loans to customers. Those lenders are not regulated by the Bank of England and so would be harder for the regulator to control or influence. The FPC met last week and will announce the result of its review this morning.
The committee has powers to impose limits on banks or tell them how it expects their behaviour to change in future. Mortgage lending faces some restrictions placed on banks by the Bank of England, including the requirement that no more than 15pc of any bank’s mortgage loan book goes to customers borrowing more than 4.5pc of their income.
Earlier this year the Bank tightened affordability criteria, ordering lenders to test borrowers’ ability to withstand a three percentage point rise in the standard variable interest rate.
The FPC feared underwriting standards were slipping and that some lenders may have been dodging the previous rule – testing a three percentage point rise in the base rate – by failing to fully pass this on to customers in their tests.
The countercyclical capital buffer, which tells banks to hold more capital in good times so they can absorb more losses in bad times, was raised from 0pc to 0.5pc in June, indicating that lending conditions are improving. Officials expect to raise it to 1pc in November, which would be a sign that normal conditions prevail in the market.