Bank of England warns lenders of complacency over consumer credit

The Bank of England has warned banks and other credit providers that they may face fresh action against careless lending, in what was referred to as a "spiral of complacency" regarding creeping levels of consumer debt.

Financial stability director Alex Brazier cautioned that a serious increase in personal loans could pose a danger to the UK economy.

While household incomes edged forward just 1.5%, outstanding payments on car financing, credit card balances and personal loans had all risen 10% in the last 12 months.

Brazier said, in a speech in Liverpool late on Monday, that: "Household debt – like most things that are good in moderation – can be dangerous in excess", and that the current trend was "dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy."

Although the readiness of consumers to take on more debt to fund spending did allow for a strong growth of the economy in the immediate wake of the Brexit vote, which was quite contrary to what the BoE had predicted, Brazier said there were "classic signs" of lenders, believing the risks were lower after this period of growth placing "undue weight" on the recent performance of credit cards and loans in "benign conditions."

Terms and conditions on credit cards had made them easier to gain and more appealing to the consumer, with 0% balance transfers and decreased interest rates, even though official interest rates had barely changed.

Companies risk losing money through personal contract purchase plans if used car prices fall.

He did state that mortgage debt had seen only a 3% increase on last year, before going on to say "even here there are some tentative signs of boundaries being pushed."

"By September we will have assessed whether the rapid growth has created any gap in the line. If it has, we’ll plug it,” Brazier said.

The BoE will continue to heavily monitor banks and building societies, and told them to set aside £11.4bn in the next 18 months in case future economic shocks meant some borrowers could not keep up their repayments.

Brazier also hinted that the Bank of England could force banks to take even further safeguards against the risk of bad debts if it was deemed necessary.

“Ten years ago, an unsafe financial system caused financial crisis and economic disaster”, he said.

“Complacency gave way to crisis. Companies and households were unable to refinance their debts. The result was economic disaster. In this country alone, close to a million jobs were lost and more than 100,000 businesses failed. Too much debt made the financial system, and the economy, unsafe. Too many people paid the price when those risks materialised.”