Bank of Eng­land’s grow­ing fears over state of con­sumer lend­ing mar­ket

Yorkshire Post - Business - - FRONT PAGE - IS­MAIL MULLA BUSI­NESS RE­PORTER Email: is­ Twit­ter: @Is­mailMulla

THE BANK of Eng­land is con­cerned over the sus­tain­abil­ity of the con­sumer credit mar­ket as com­pe­ti­tion in the sec­tor is lead­ing to peo­ple get­ting credit more read­ily.

Don Kohn, an ex­ter­nal mem­ber of the Fi­nan­cial Pol­icy Com­mit­tee (FPC) at the cen­tral bank, says that if the econ­omy’s per­for­mance doesn’t turn out to be as pos­i­tive as peo­ple ex­pect it could lead to trou­ble in the con­sumer credit lend­ing sec­tor.

The FPC is re­spon­si­ble for iden­ti­fy­ing and deal­ing with risks to the UK’s fi­nan­cial sta­bil­ity. The com­mit­tee is set to meet later this month to dis­cuss what ac­tions it could take to en­sure lenders be­have re­spon­si­bly in the face of in­creased con­sumer credit lend­ing com­pe­ti­tion.

The York­shire Post Speak­ing to dur­ing a visit to the re­gion, Mr Kohn said: “Con­sumer credit is grow­ing very rapidly. What I heard here in Leeds is con­sis­tent with the na­tional pic­ture.

“There’s in­creased com­pe­ti­tion in this mar­ket from new en­trants and from older en­trants.

“Some of the largest banks dropped back from the mar­ket to some ex­tent right af­ter the cri­sis and as they re­cover they’re reen­ter­ing this mar­ket.

“That com­pe­ti­tion has tended to com­press mar­gins. It has tended to make credit more avail­able. So far ar­rears and prob­lem loans have not in­creased greatly. They still re­main at a low level.

“There’s some con­cerns that loans may be made now that peo­ple will have trou­ble re­pay­ing.”

He added that the FPC would take “a good look” at what ac­tions could be taken “to make sure that con­sumer lend­ing doesn’t pose ex­ces­sive risk to fi­nan­cial sta­bil­ity”.

Con­versely the mort­gage mar­ket “seems to be in pretty good shape”, says Mr Kohn, with safe­guards put in place by the Fi­nan­cial Con­duct Author­ity and the FCP hav­ing the de­sired ef­fect.

A decade on from the banking cri­sis, the Bank of Eng­land pol­i­cy­maker be­lieves that a lot of work still needs to be done to re­pair the sec­tor’s rep­u­ta­tion with the pub­lic.

How­ever, fi­nan­cial sys­tems are now much more safer than they were a decade ago, he said.

Mr Kohn said “there’s a lot of work to do” in re­pair­ing the fi­nan­cial sec­tor’s rep­u­ta­tion.

He added: “A num­ber of im­por­tant steps have been taken to make the heads of th­ese in­sti­tu­tions and the peo­ple in re­spon­si­ble po­si­tions more ex­plic­itly re­spon­si­ble for what goes on be­low them, there­fore in­cent­ing them to be­have in a re­spon­si­ble way.

“There’s been a lot of work done on com­pen­sa­tion. Try­ing to cor­rect the very ad­verse sig­nals that were sent by the old com­pen­sa­tion sys­tem which were to in­duce peo­ple to go for very short term prof­its and then leave.

“Now you have to have a longer per­spec­tive. I think in­sti­tu­tions have tried to change their cul­tures.

“Do I think this process is com­pletely suc­cess­ful and done? No I do not. When you lose the pub­lic’s trust, when you be­have in a way that mer­its you los­ing the pub­lic’s trust, it’s go­ing to take a long time and a long pe­riod of be­hav­ing in a re­spon­si­ble, trust­wor­thy way to re-earn that trust.

“The pub­lic is right to be scep­ti­cal. They need to see be­hav­iour con­sis­tently over time and it’s way too soon for that to have hap­pened.”

The Adam Smith Institute branded the Bank of Eng­land’s stress tests as “worse than use­less”.

Mr Kohn though says he “strongly dis­agrees” with that as­sess­ment. He be­lieves the stress tests, which are de­signed to ex­am­ine a bank’s abil­ity to with­stand a se­vere fi­nan­cial shock, are strin­gent. Mr Kohn said: “To me they’re ex­tremely use­ful and they are an im­por­tant way for the Fi­nan­cial Pol­icy Com­mit­tee to com­mu­ni­cate with the banking sys­tem and with par­lia­ment, and the pub­lic to hold us ac­count­able. They are com­pletely trans­par­ent. The sce­nar­ios are out there – they’re trans­par­ent. The re­sults are made pub­lic on a bank by bank ba­sis un­like a lot of su­per­vi­sory in­for­ma­tion which is confidential.”

The odds of a re­peat of the banking cri­sis of the scale seen in 2007 is very small, says Mr Kohn.

He added: “The amount of cap­i­tal banks have, that’s the amount they have against un­ex­pected de­vel­op­ments to cush­ion them when un­ex­pected things hap­pen, is mul­ti­ples higher than it was in 2006/07.

“You never can tell what would hap­pen but the sys­tem is just so much stronger than it was and it’s get­ting stronger all the time.”

I think in­sti­tu­tions have tried to change their cul­tures. Don Khon, ex­ter­nal mem­ber of the Fi­nan­cial Pol­icy Com­mit­tee


TAK­ING AC­TION: Don Kohn, an ex­ter­nal mem­ber of the Fi­nan­cial Pol­icy Com­mit­tee, said there are con­cerns that peo­ple may have trou­ble re­pay­ing loans.

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