Con­sumers face credit squeeze by banks

Debt moun­tain has risen to ‘dan­ger­ous lev­els’ Len­ders warned of huge losses if rates rise sharply

The Guardian - - FINANCIAL - An­gela Mon­aghan

Bri­tish banks are plan­ning the big­gest squeeze on con­sumer credit since late 2008, when the econ­omy was in the depths of re­ces­sion.

The clam­p­down, high­lighted in a Bank of Eng­land re­port, fol­lows warn­ings that Bri­tain’s debt moun­tain has risen to dan­ger­ous lev­els as house­holds strug­gle with ris­ing prices and low wage growth.

The sur­vey showed len­ders’ ex­pec­ta­tions for the avail­abil­ity of un­se­cured lend­ing to house­holds over the next three months. It shows the sharpest drop since the fourth quar­ter of 2008, when the UK econ­omy con­tracted by 2.2%.

Sa­muel Tombs, the chief UK econ­o­mist at Pan­theon Macroe­co­nomics, said: “It does look like banks are start­ing to clamp down on the sup­ply of un­se­cured credit.”

He said a num­ber of fac­tors were mak­ing len­ders more cau­tious, in­clud­ing a warn­ing from the Bank last month that len­ders could in­cur £30bn of losses on credit cards, per­sonal loans and car fi­nance if in­ter­est rates and un­em­ploy­ment rose sharply.

De­mand for se­cured lend­ing – largely mort­gages for house pur­chases – fell slightly in the third quar­ter and is ex­pected to be un­changed in the fi­nal quar­ter.

Len­ders have made it more dif­fi­cult for con­sumers to take out new credit cards and un­se­cured loans such as over­drafts in re­cent weeks, tight­en­ing lend­ing cri­te­ria and ap­prov­ing fewer ap­pli­ca­tions.

“Some len­ders re­ported that they had slightly tight­ened their credit cri­te­ria for some prod­ucts,” the Bank re­ported. “Mo­ti­va­tions for this in­cluded con­cerns about cus­tomer in­debt­ed­ness and the squeeze in real in­comes.”

Bank ex­ec­u­tives said the de­ci­sion to cut back on credit avail­abil­ity had been driven by the Bank of Eng­land’s warn­ing last month about the scale of the losses banks might face in a re­ces­sion. Next month len­ders will find out how much ex­tra cap­i­tal Thread­nee­dle Street wants them to set aside to pro­tect against po­ten­tial con­sumer credit losses. Each lender will get its own as­sess­ment.

Last month, the chief fi­nan­cial reg­u­la­tor urged the gov­ern­ment to step in to help tackle the moun­tain of debt be­ing racked up by the most vul­ner­a­ble con­sumers.

An­drew Bai­ley, the chief ex­ec­u­tive of the Fi­nan­cial Con­duct Au­thor­ity, said he was con­cerned about the num­ber of peo­ple who needed loans to make ends meet. Len­ders tak­ing part in the Bank’s lat­est credit con­di­tions sur­vey re­ported a slight in­crease in credit card de­faults in the third quar­ter and a sig­nif­i­cant rise in the num­ber of de­faults on other un­se­cured lend­ing, which in­cludes over­drafts and per­sonal loans. A grow­ing re­luc­tance among banks to ex­tend con­sumer credit comes as mar­kets and econ­o­mists bring for­ward their ex­pec­ta­tions for the tim­ing of the first rise in in­ter­est rates in more than a decade.

Pol­i­cy­mak­ers at Thread­nee­dle Street are widely ex­pected to in­crease rates from their all-time low of 0.25% to 0.5% when they an­nounce their de­ci­sion on 2 Novem­ber. The last time the Bank raised rates was July 2007, be­fore the fi­nan­cial cri­sis took hold.

Tombs said higher bor­row­ing costs were likely to dampen de­mand for credit among con­sumers. “Faced with the prospect of higher in­ter­est rates, house­holds are likely to be more cau­tious about their bor­row­ing,” he said.

The avail­abil­ity of loans to busi­nesses is ex­pected to re­main roughly un­changed over the next three months.

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