The Bank of England has issued a warning to banking bosses over the risks surrounding consumer debt.
Its Prudential Regulation Authority (PRA) has found that banking executives are not receiving adequate information about consumer debt and has written to the banks warning them to “remain vigilant” about the heightened risks around the rise of consumer debt levels.
The warning comes following a review of consumer lending by the PRA which covered car financing, credit cards and personal loans in the first half of 2017. The PRA found that executives may be missing warning signs and receiving inadequate information.
In a letter to the Banks it said, “our main finding concerns weakness in management information and governance.”
It went on to explain that some companies’ board risk committees, “do not routinely receive sufficient standardised MI (management information) on consumer credit to recognise when a shift in asset quality or portfolio performance is taking place.” It went on to stress that, “more systematic reporting” will be necessary for banks that rely heavily on consumer credit.
It is only a matter of months since the Bank of England’s Financial Policy Committee (FPC) stated that lenders were “underestimating” the risks of growing household debt.
Since the financial crisis, the quality of consumer credit has “improved significantly” it said, but it also found that lenders were using the wrong guidelines and relying too heavily on how consumer lending portfolios affect firms under “benign conditions” – which may change under economic or financial stress.
The FPC went on to say, “As a result, they have been underestimating the losses they could incur in a downturn,” and it believed that commercial banks were collectively exposed to potential losses of around £30 billion, representing about 20% of UK consumer credit loans, which was £10 billion more than previously estimated.
The PRA, in their letter to the banking executives, did recognise that some firms showed signs of “effective risk management and controls for consumer credit and understood the risks in their business” which included stricter underwriting standards such as reducing 0% interest credit card periods. It cautioned that “risks remain elevated and continued vigilance is required by lenders and the PRA alike”.
It followed a grilling of Bank of England staff by MPs a day earlier, who asked whether banks were aware of the problem.
Treasury Select Committee member and Labour MP John Mann said he hoped further attention to the issue would help prevent another credit bubble.
“Stagnant real wages over recent years have meant many households have looked to credit cards and car loans to maintain their standard of living.
“I warned the Bank of England about their dangers in October.
“Back in 2008, early mortgage defaults were the first warning signs: I hope that evidence on this in recent weeks will lead to real action being taken to make sure that consumers and the wider economy don’t suffer from the burst of another bubble.”