BORROWING BOOM COULD LEAVE US BUST
THE biggest danger on the horizon for Britain’s robust economy is our credit card-fuelled borrowing binge. If it is not urgently brought under control by the authorities, it could rapidly lead to a nasty bust.
We all know from the build-up to the financial crisis of 2007/08 how vulnerable Britain is to a credit bubble that bursts. Prosperity is brought to a shuddering halt, devastating the lives of those least able to absorb the pain.
What is most shocking is that many of the same banks and financial institutions so mortally damaged by the panic of less than a decade ago are now building profits on the back of unsecured personal loans, credit cards, car finance deals and payday loans.
In the past month alone, shoppers put another £520million on their credit cards. Families now owe a record £67.3billion, according to the Bank of England.
An optimist could argue that the willingness of consumers to spend as if there were no tomorrow is an encouraging sign that – despite all the ‘Project Fear’ warnings of an economic crash caused by Brexit – the British people remain supremely confident about the nation’s prospects.
But there is increasingly evidence that our big banks, which acted so irresponsibly prior to the last financial crisis – with unsustainable models such as the notorious 125 per cent mortgage at Northern Rock – are up to mischief again.
As the Mail reports today, three quarters of credit card providers, including names such as Lloyds Bank, are willing to offer plastic to people earning little or nothing.
Moreover, they tempt customers along the road to ruinous debt with zero-rate offers. Yet when those deals run out, the borrowing costs rise rapidly, leaving some of the most vulnerable and least financially literate people up to their necks in debts they may never be able to repay.
WHAT is unconscionable is that Lloyds Banking Group, of which the taxpayer still owns a portion, is one of the leading players in this market, as it was in the payment protection insurance scandal which cost it £17.3billion in compensation.
Despite its high street domination through its Lloyds and Halifax brands, the bank spent £1.9billion in December buying up the seven million clients of the American MBNA credit card company. This simply adds to its exposure in an already over-extended marketplace.
In the run-up to the financial crisis, household debt as a proportion of the nation’s total output climbed to 160 per cent.
In the great recession which followed it fell to 140 per cent, but Bank of England data shows it is on the rise again.
It has just been reported that the proportion of household income saved in the final quarter of last year sunk to its lowest level on record – 3.3 per cent.
The leading accounting firm PwC warns that ‘the UK consumer appears to be living beyond their means’ – just as higher import prices for food and energy feed through to household budgets.
The concern must be that if inflation continues to rise people living on credit will find it ever harder to meet payments on their credit card bills and the cost of car leasing loans. The finance arms of the banks have been paying huge commissions to distributors and dealers who sell or lease vehi- cles using loan agreements. As with credit card finance, there is an enormous risk that such loans could blow up in the faces of the borrowers who can no longer afford to pay them, and that the lenders will then see their bad debts soar.
The Bank of England has ordered the Prudential Regulation Authority, its arm which polices the big banks, to make checks on the quality of credit being disbursed.
BUT with the use of credit soaring by 10 per cent in the last year – and the cost of an unsecured loan of £10,000 falling from 10 per cent in 2009 to 4 per cent now – it is hard to see how the authorities can avoid taking urgent action.
At least the consumer regulator, the Financial Conduct Authority, has already taken draconian steps designed to curb irresponsible mortgage lending by demanding far higher standards of credit checks on applicants. These go through every aspect of borrowers’ lives, from membership of sports clubs to the amounts spent on foreign holidays.
In the aftermath of the financial crisis, the Bank of England asked for, and received from, the Treasury a ‘ tool box’ of powers allowing it to take direct measures to restrict lending. Clearly, what is needed now is the same level of intense scrutiny for unsecured loans and credit cards as that which is applied to mortgage borrowers.
In addition, the Bank could order high street lenders to restrict the amount consumers can borrow, which would free up more cash for lending to small businesses, exporters, and the technology and health science industries, which are so important to the UK as it sets out on a new course.
It is not in the interests of anyone involved to allow the present explosion of credit to go on unchecked.