Banks Concerned About Personal Borrowings – as a result of the increase in borrowing among consumers in the UK, it may threaten the future stability of the UK’s financial situation.
The Bank of England believe that the instability comes from the risk of borrowers not being able to keep up with their repayments on loans if there was another recession.
The Bank’s fears have been made very real through the recent minutes from the Financial Policy Committee. It stated that they was a sufficient growth in credit cards, bank loans and car loans being taken out.
The amount of credit that was borrowed at the end of 2016 had risen to 10.0%, the highest rise since 2006. However, it did settle in the following months after.
It seems car loans are the highest growing, with credit cards and personal loans continuing to rise. The main worry is that the increase is occurring due to poor lending practises by lenders.
The Financial Policy Committee believe that the increase in interest free credit cards may also cause problems in the future. This is because customers may default on their loan in the future or by the end of the interest free period transfer the debt to another credit card and continue carrying on the debt.
The Bank of England are Concerned and Might Act
The Bank of England is also aware of lenders offering larger, unsecured personal loans than before. The worry is with less strict lending and the increase in the amount being lent, if there was to be an economic downturn, the chances of borrowers defaulting on loans and credit cards is highly likely. This in turn will have a huge impact on the financial status of the country as a whole.
During last year’s stress-testing of UK banks it was found that if there was another recession in the UK there was a realistic possibility of the Banks losing up to £18.5 billion from unpaid credit card and loan debts. This is compared to £11.8 billion on losses on unpaid mortgage payments.
To help with this risk the Bank of England and the Financial Policy Committee believe that underwriting standards needed to be monitored more closely to ensure they were not too weak.
Currently the Bank is keeping an eye on the situation before making a decision on the countries financial future. However, if needed it will take action by restricting consumer lending if required.
The Prudential Regulation Authority has already been investigating the quality of consumer credit lending and depending on the results, may affect how the Bank of England will move forward with the situation.