The rapid growth of lending to consumers risks weakening the resilience of British banks, according to the Bank of England body tasked with maintaining the UK’s financial stability.
Weaker underwriting standards could “reduce the resilience of lenders to shocks”, the Financial Policy Committee said, according to the minutes from its latest meeting.
The FPC said “underwriting standards should be monitored closely” to avoid a blow-up. Conditions in the consumer lending market could “deteriorate quickly”.
Non-mortgage lending in the UK grew by 10.5 per cent in the year to February, according to the Bank’s data. It had peaked at 10.9 per cent annual growth in November, its fastest increase since 2005.
Consumer credit risks have risen up the Bank of England’s agenda as stress tests on bank balance sheets have shown consumer lending, which includes unsecured loans and credit cards, would create bigger impairments on loans than mortgage lending in the event of another financial crisis.
The 2016 stress test showed stressed impairments on UK consumer credit exposures totalled around £18.5bn, compared with £11.8bn for UK mortgages.
The FPC noted the Bank’s own monetary policy may have contributed towards the growth in consumer credit, with more attractive lending terms, such as longer interest-free periods and higher maximum loan sizes, becoming increasingly prevalent.
The minutes said: “The easing in credit supply conditions appeared to have contributed to the growth in consumer credit, with intense competition in some segments of the market.”
The Prudential Regulation Authority (PRA), the Bank body responsible for regulating UK banks, has launched a review into lending standards to try to counteract any negative effects from historically accommodative monetary policy.
The PRA introduced limits to the amount of larger loans banks can extend in 2014 in a bid to reduce exposure. However, the FPC noted the number of loans just below the threshold for the limit – loans of more than 4.5 times income – had increased strongly.