Last week the Bank of England Financial Policy Committee ("FPC") released a statement following its meeting on 20th September. Among other things, the statement summarises the recent work carried out by the FPC in relation to consumer credit lending.
It is accepted that quality in consumer credit lending has improved since the financial crisis. However, the FPC has raised concerns that this could be misleading due to the current conditions in the market which it describes as "benign", adding that lenders are placing too much weight on these conditions when assessing the recent performance of consumer lending and credit quality. Its warning for lenders and consumers alike is that this encourages greater risk taking which in turn could cause potentially greater vulnerabilities.
The FPC is encouraging lenders, particularly the major banks, to consider what would happen in a downturn and whether they would be prepared for this. The statement describes a "pocket of risk" caused by the rapid growth of consumer credit and the FPC is concerned that an increased number of consumers could default and lenders could suffer losses as a result of a market downturn. It is simply warning the banks to be prepared and not to be misled or place too much reliance on these benign market conditions.
To address these risks, the FPC stepped up its annual stress test looking at stressed losses on consumer credit lending. The full results of the annual stress test are to be published in November but the idea is to establish whether the major banks require further resilience for this type of lending. The results may serve as a further warning to banks not to underestimate potential losses in times of severe stress. Assessing consumer credit is an important factor when determining whether a bank is prepared for and could withstand an economic downturn.
Despite the above, the level of risk posed to the UK financial system from the domestic market remains at "standard" level meaning it is largely unchanged. The work being carried out by the FPC is important for the both sides of the marketplace; it should help protect lenders and consumers as consumer credit lending continues to grow apace.
For further information contact Geoffrey May