Consumers face credit squeeze by banks
Debt mountain has risen to ‘dangerous levels’ Lenders warned of huge losses if rates rise sharply
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.