Debt-ridden familes could crash whole economy, warns Bank

FAMILIES piling up too much debt pose a risk to ‘everyone else in the economy,’ the Bank of England warned last night.

Its sounded alarm bells over risky mortgage lending, mounting credit card debts and an explosion of car finance deals.

Lenders were heading for a ‘spiral of complacency’ as low interest rates encouraged potentially catastrophic borrowing binges.

In a stark warning that Britain could be heading for another major financial crisis ten years on from the last, the Bank’s director for financial stability, Alex Brazier, said there were ‘ signs of boundaries being pushed’ by banks now offering riskier mortgages.

‘Household debt, like most things that are good in moderation, can be dangerous in excess,’ he said. ‘Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.

‘The economic dangers of debt can be so costly that all else pales in comparison.’

The alert comes after years of rock-bottom interest rates: 0.25 per cent since last August and 0.5 per cent for the seven years before that.

In a hard-hitting speech at the University of Liverpool, Mr Brazier said: ‘Lenders can enter a spiral of complacency. Standards can go quickly from responsible to reckless.’

In the past year, car loans, credit card balances and personal loans had increased by 10 per cent while incomes had risen by just 1.5 per cent.

The average length of a zero per cent credit card balance transfer had doubled to around 30 months in recent years, while the interest on a £ 10,000 personal loan had plunged from 8 per cent to 3.8 per cent with barely any change in the official rate. ‘These are all classic signs of lenders thinking the risks are lower,’ said Mr Brazier.

He said the number of new cars bought with PCP plans — where the car is effectively leased — had soared from one in five in 2006 to four in five. Mr Brazier said firms risk losing out if used car prices fall because PCP buyers would hand vehicles back after three years rather than buy them outright, which would force prices down even further.

Mortgage lending had not increased so quickly but there were ‘tentative signs of boundaries being pushed’. In the last two years, loans amounting to more than four times the borrower’s income had risen from 19 per cent of the market to 26 per cent, while the proportion of new mortgages with terms of 30 years or more had risen to more than a third.

‘That lowers initial monthly payments but means the debt hangs around for longer, in some cases beyond possible retirement ages,’ he added.

Mr Brazier also warned that similar levels of complacency were at the root of the last major recession.

‘Ten years ago, an unsafe financial system caused financial crisis and economic disaster,’ he said. ‘The western banking system had expanded rapidly. Banks and their regulators had been blind to the basic fact that more debt meant greater risk of loss. Complacency gave way to crisis. Companies and households were unable to refinance 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.’

He said ‘the financial system has been made safer, simpler and fairer’ but added: ‘Sadly we can never declare mission accomplished.

‘The financial system has a habit of creating too much debt. And even when the overall temperature is just right, there can be pockets of debt that are too hot.’

‘Boundaries are being pushed’