27th September 2017

Consumer debt crisis grows

Banks are now said to be at risk of the current consumer debt crisis costing them £30 billion

This is according to the Bank of England. It has issued its strongest warning yet about the UK’s growing consumer debt. Britain’s banks could incur losses on their lending on credit cards, personal loans and for car finance if interest rates and unemployment rose sharply.
The Financial Policy Committee said “lenders have been underestimating risks in consumer credit”. Banks should keep back £10bn to protect themselves against this increasing risk.
The Bank is also concerned about the impact of Brexit on £20tn of the resulting contracts used by companies.
Alex Brazier, the Bank’s executive director of financial stability warned of a “spiral of complacency”. This is a consumer credit market that was growing at 10% a year. This is alongside household income growing at just 1.5%.
The Bank is not concerned that consumer debt will be a risk to economic growth as it is only 11% of household debt. However, it is a risk to the lenders because they may not be able to withstand losses in a downturn. These loans are less likely to be repaid when consumers lose their jobs or face higher interest rates.

Mike O’Connor, chief executive of charity StepChange, said “action is needed to stop products like credit cards and overdrafts walking people into difficulty, and lenders must do more to help people safely manage their way out of persistent debt.”

Labour has proposed a cap on credit card rates. This means people would not have to pay back more than twice the amount of their credit card borrowings. This is to help those customers with long-standing debts. With the £30bn of potential losses, credit cards would be most severely affected with a 25% default rate. 15% for personal loans and 10% on car finance.
The Bank has seen each firm’s Brexit plans and has said they also lack “robust contingency plans” to tackle changes to the way that they will be able to store consumer data in the UK after March 2019. “Many firms currently rely on data centres located in the United Kingdom to provide financial services across Europe,” the Bank said.