Bank of England warns more defences are needed against consumer credit

The Bank of England said on Monday it could compel banks to hold more capital as an “insurance policy” to secure the wider economy if the fast growth in consumer credit goes bad.

Alex Brazier, the BoE’s executive chief for financial stability, said that while loans, in general, has developed in accordance with the British economy, outstanding car loans, credit card balances and personal loans have risen by 10pc, far outpacing rises in income.

In a time of good financial performance, banks think they can reduce costs and relax loaning policies, he said.

“The spiral continues, and borrowers rack up more and more debt,” Mr Brazier said in a speech in Liverpool.

“Lending standards can go from responsible to reckless very quickly… Lenders have not entered, but they may be dicing with, the spiral of complacency.”

It is the most recent cautioning on consumer credit from the BoE, which has just reacted by presenting three “defence lines”, including tighter supervision of banks and tightening mortgage loaning guidelines to stop “boundaries” being pushed, for example, an ascent in loaning at higher loan-to-income multiples.

The third “defence line” includes stress testing loan specialists to check whether they hold enough cash-flow to manage losses.

“And to make sure this defence line is kept robust in the face of rapid consumer credit growth, we are accelerating this year’s test of banks’ consumer credit loans,” Mr Brazier said.

“By September we will have assessed whether the rapid growth has created any small gap in the line. If it has, we’ll plug it.”

Mr Brazier highlighted car loans, stating alleged personal contract purchase or PCP from the finance arms of automakers now fund nearly four out of five new auto purchases.

Even if a borrower makes all the monthly payments on a PCP agreement, the lender can still lose money if used car prices fall.

Regardless if a borrower makes all the regularly scheduled instalments on a PCP, the lender can lose money if used auto prices fall.

“The finance company is left with a car that has depreciated by more than they’ve been paid,” Mr Brazier said.

However, the barrier lines may now be beginning to kick in, he stated, with consumer credit hinting at moderating and new auto registrations falling.

The point is to stop the economy from suffering unlimited rehashes of “Debt Strikes Back” movie, he included.

“For now, settle back with your popcorn and watch the, oddly, not yet highly grossing, new blockbuster, the Return of the Regulator.”