“Bigger Systemic Risk” Now Than 2008 - Bank of England
The state of the things at a retail level is somewhat terrifying. Household lending is growing at 10.3% a year – outpacing the 2.3% rise in household income. The total credit owed by UK consumers at the end of April 2017 was £198 billion, with credit card borrowing at a record £67.7 billion. The BOE is so concerned that it has told lenders to set aside £11.4 billion to protect against defaults.
More concerning about the state of household debt is that Bank of England data shows 15.75pc of all new mortgages taken out in the first quarter of 2017 were for terms of 35 years or more.
But, the latest growing area of debt is car financing. £58 billion of car dealership finance. Just £24 billion of this comes from banks. The rest is from other lenders, such as dedicated motor finance firms. They do not have to follow the strict lending rules on having capital buffers to cover losses like banks do – a development the Bank of England is concerned about.
It has been ten years since the last interest rate hike. A decade is a long-time, enough time for the market to welcome in a new generation of borrowers who are unfamiliar with higher interest rates and the dangers of borrowing. Most concerning is it seems no matter who they borrow from, they are disinterested in the state of regulatory demands.
It has been more than a decade since 60+ banks and building societies were issued a similar warning in 2004. Many failed to listen to the warnings given.
"As survivors, societies here today ought to be well aware of the warning signs, but I’m conscious that corporate memories can be shed surprisingly fast…I would observe that part of the reason why only 44 societies are attending this conference rather than the 60+ that came to its equivalent in 2004 lies in the fact that many of those societies were unaware of, or failed to control, the risks they were taking."
- Sam Woods of PRA
Similarly aware of this lack of insight, the Bank of England recently asked lenders how these new borrowers affected the banks’ credit-scoring models, as the banks themselves are the first line of defence when it comes to protecting the economy (and taxpayers) against increased risk.