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BOE warns about growth of United Kingdom consumer credit

25 September, 2017, 22:24 | Author: Jeff Stephens
  • Consumer credit continues to be an issue for the Bank of England

Recent figures show that the annual rate of growth for unsecured consumer borrowing through credit cards, overdrafts and personal loans still stood at 9.8pc in July.

The fast rise in credit like auto loans or credit card debt may not be a threat to the overall economy, accounting for just 11 percent of household debt, but it represents a risk to "banks' ability to withstand severe economic downturns, because this asset class is disproportionately more likely to default", the Bank of England's Financial Policy Committee said.

"It is a risk to banks" ability to withstand severe economic downturns, because this asset class is disproportionately more likely to default'.

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The Bank of England has warned that the United Kingdom banking system could incur consumer credit losses of around £30 billion if there is another economic downturn - £10 million more than previous estimates. "As a result, they have been underestimating the losses they could incur in a downturn", it said.

New capital buffers requirements will be set for individual lenders after the next set of stress test results are published on November 28.

The £30bn losses in this stress test comprised impairment rates of around 25% on credit cards, 15% on personal loans and 10% on vehicle finance. The worst case scenario incorporated a United Kingdom economic downturn that has the unemployment rate rising to 9.5%, and Bank Rate rising to 4%.

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"The FPC also expects that banks will begin to factor these market-wide levels of stressed losses on consumer credit into their overall lending and capital plans", the committee said.

A report in Guardian states that the shares in United Kingdom banks and insurers dropped this morning amid a warning that a recession could create £30bn of consumer credit losses.

Separately, the FPC said it was likely to raise the countercyclical capital buffer, which is meant to provide cash padding in the event of a banking crisis, later this autumn.

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'The FPC continues to assess the risks of disruption to financial services arising from Brexit so that preparations can be made and action taken to mitigate them, ' it said.

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