Lenders underestimating consumer debt CRISIS risks, Bank of England warns

Lenders underestimating consumer debt CRISIS risks, Bank of England warns

The warning from the committee, which assesses the financial risks to the British economy on a quarterly basis, comes on the day that Britain's main opposition Labour Party is calling for limits on credit card interest rates so that no one pays back more than twice the amount of their original borrowing.

The Financial Policy Committee (FPC) said that while climbing debt levels do not pose immediate risks to the British economy, banks are in a more precarious position.

It said banks must hold around an extra £10bn to guard against the increased "pocket of risk" of a fast-growing consumer credit sector.

"Growth of consumer credit remains well above the rate of growth in household disposable income", the committee said in a report on a meeting held September 20.

The panel said that if borrowers were to default on 20% of the loans they've taken out, banks would be saddled with losses of around GBP30 billion ($40.5 billion).

It added: "Lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality".

It is concerned that lenders "have been underestimating the losses they could incur in a downturn" and has therefore revised its analysis of credit losses that banks could incur in a deep recession encapsulated in the 2017 annual stress test.

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.

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

The Bank's stress test exercises are meant to measure how United Kingdom lenders would fare in an economic downturn and under hard market conditions.

This was down from the 11 per cent growth rate seen in late 2016, but remains high by historic standards and considerably above the growth rate of United Kingdom household incomes.

The Bank will also continue to monitor the effects of Brexit, particularly in light of the potential disruption to the financial services industry. Those risks include cross-border contracts, in particular insurance and derivatives; restrictions on sharing of personal data between the European Union and United Kingdom; and restrictions after Brexit on cross-border banking, and asset management provision.