Banks and building societies have seen an uptick in defaults in both secured and unsecured lending – a trend that is expected to continue over the next three months, according to new data published by the Bank of England today.
In the three months to February, UK lenders included in the Bank’s credit conditions survey reported that default rates on secured loans to households – the majority of which are mortgages – increased and “were expected to increase further” in the next three months.
Default rates on unsecured loans – such as credit cards – also increased and were also expected to rise over the course of the next quarter.
Although the availability of credit for secured lending remained steady in the first quarter, lenders expect it to slip in the next three months suggesting banks are becoming increasingly risk-averse.
Capital Economics’ Ashley Webb suggested this was because lenders expect “wholesale funding conditions to deteriorate further” following March’s mini-banking crisis.
Borrowers with a loan to value ratio of more than 75 per cent are most likely to find it difficult to get loans, the data showed.
While provision of credit for unsecured loans dropped in the quarter, it is expected to pick up slightly in the next three months.
However, the interest free loan periods available for credit cards decreased in the first quarter of the year and is expected to narrow further.
Credit for businesses was unchanged and was likely to remain constant over the next few months.
Although default rates on loans to large businesses were unchanged, “but slightly increased for medium and large businesses” last quarter. Default rates for medium-sized businesses was expected to “increase slightly.”
The Bank of England conducts its credit conditions survey every quarter to help it understand trends and maintain financial stability. Lenders are asked to report changes in the previous three months and their expectations for the next three months.
“The results are based on lenders’ own responses to the survey. They do not necessarily reflect our views on credit conditions,” the Bank said.
The survey was conducted between 27 February and 17 March meaning the impact of problems in the banking sector during March were unlikely to have been fully captured in the results.
Hargreaves Lansdown’s Susannah Streeter said “it’s too early to establish just how much the picture will have changed, but central banks are bracing for a further tightening of credit conditions.”
Webb agreed, arguing “banks will reduce the amount of credit available in the coming months” as a result of the banking crisis, and this “will weigh on real activity.”