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Lenders to face extra £10bn losses from consumer credit: BoE

25 September 2017

The Bank of England has issued a fresh warning to the UK's banks and lenders that they are underestimating the risks of growing consumer debt levels in Britain.

It warned that as a result in a severe recession "the UK banking system would, in aggregate, incur UK consumer credit losses of around £30bn, or 20% of UK consumer credit loans".

Consumers credit customers "disproportionately more likely to default" than other borrowers.

After assessing the fast growth in the consumer credit market, Threadneedle Street is requiring the banking system to hold an extra £10bn of capital as protection against any future losses after finding that lenders are underestimating their exposure to bad debts in an economic downturn.

"Although the overall credit quality of consumer credit has improved significantly since the financial crisis, the FPC judges that lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality".

Consumer borrowing has reportedly increased by more than 10 per cent a year over the last few years and the household savings rate hit an all-time low at the beginning of this year, raising concerns about consumers' ability to pay back the large amount of debt that has been accumulated.

Looking ahead the GBP/USD exchange rate may push higher again tomorrow as the British Bankers' Association (BBA) releases the UK's latest mortgage figures, with economists forecasting that home loan approvals will have risen in August.

In a related development, Royal Bank of Scotland (RBS) has announced postponing the launch of a new low-interest rate credit card stating fears over increasing consumer debts in the UK. Domestic credit has grown broadly in line with nominal GDP over the past two years.

In turn this would knock 150 basis points from aggregate common equity Tier 1 capital ratio of the United Kingdom banking system.

Lenders to face extra £10bn losses from consumer credit: BoE