Banks to put aside billions due to credit risk

UK banks will need to put aside an extra £10 billion to help protect them from consumer credit losses.

The Bank of England’s Financial Policy Committee (FPC) said while climbing debt levels do not pose immediate risks to the British economy, banks are in a more precarious position.

“Within a benign overall domestic credit environment, there is a pocket of risk in the rapid growth of consumer credit,” the FPC said.

“This is not a material risk to economic growth, as consumer credit represents only 11% of overall household debt.

“It is a risk to banks’ ability to withstand severe economic downturns.”

It said that while the quality of consumer credit has “improved significantly” since the financial crisis, lenders are using the wrong benchmarks.

The FPC said it now believes commercial banks are collectively exposed to potential losses of around £30bn, representing about 20% of UK consumer credit loans.

That is £10bn more than previously outlined. New capital buffers requirements will be set for individual lenders after the next set of stress test results are published on November 28.

Separately, the FPC said it was likely to raise the countercyclical capital buffer, which is meant to provide cash padding in the event of a banking crisis, later this autumn.

The bank will also continue to monitor the effects of Brexit, particularly in light of the potential disruption to the financial services industry.

It raised concerns over the loss of cross-border contracts for insurance and derivatives, restrictions on sharing personal data between the UK and EU, as well as cross-border banking, central clearing and asset management.

The Bank of England.