New bank crash fears over rise in easy credit

Car loans and card spending boom risk another financial crisis, says Governor

BANKS are “forgetting the lessons of the past” and risking a new financial crisis by allowing a sharp increase in car loans and credit card debt, the Governor of the Bank of England has warned.

Mark Carney suggested lenders were making it too easy to borrow money on the assumption that alltime-low interest rates will continue indefinitely.

With unsecured consumer credit growing by more than 10 per cent each year, the Bank is concerned that lenders will be badly exposed if there is a recession and customers cannot pay off debts.

In particular, the Bank is concerned about the rapid growth of car finance, which allows buyers to take out loans bigger than their salaries.

Figures released yesterday by the Bank as part of its financial stability report showed that finance from car dealerships is increasing at a rate of 20 per cent per year and has grown by £30billion since 2012 to £58billion.

New affordability rules to be published next month are expected to include a cap on car loans, possibly based on the ratio of a car’s value to the driver’s salary.

The rise of personal contract purchase plans (PCPS) has echoes of the sub-prime mortgage scandal that helped trigger the 2008 financial crisis.

Nine in 10 new car sales are now financed by PCPS, which charge a small deposit and a monthly “rental” until the car is handed back at the end of the term, typically three to four years.

Mr Carney said the financial sector faced a “wide range of risks”, of which the biggest was the growth of consumer lending. Credit card borrowing is up 10 per cent and personal loans have risen by around 7 per cent.

Personal loans and overdrafts currently account for £72billion of lending and credit cards £67 billion. The Bank said online shopping and contactless cards had “encouraged greater credit card use”.

Mr Carney said: “Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. And lenders may be placing undue weight on the recent performance of loans in benign conditions.”

He also expressed concerns that homeowners are being granted mortgages they will not be able to afford if interest rates rise.

The Bank of England yesterday took steps to cool down borrowing by imposing new guidelines that will make it harder to obtain mortgages, and ordered banks to increase their capital reserves by £11.4billion over the next 18 months to protect them if the boom turns to bust.

The move will increase speculation that the Bank may be close to raising interest rates from the record low of 0.25 per cent. Earlier this month, three out of eight members of the Bank’s

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monetary policy committee voted in favour of increasing interest rates to 0.5 per cent, representing the biggest split in the committee in six years.

Lenders have also been warned that new affordability rules will be issued next month that will subject borrowers to more stringent tests to predict whether they can afford the loans and credit cards they apply for.

A stress test for the banking sector has been brought forward from November to September, reflecting the urgency of the situation.

Mr Carney, speaking as he published the bi-annual financial stability report, said the Bank’s Financial Policy Committee (FPC), which he heads, was continuing to work on contingency planning for a “range of possible outcomes” of Brexit negotiations.

The report said consumer credit had grown much faster than household incomes in the past three-to-four years, and “during that period, dealership car finance has seen the fastest expansion”. Next month, the Financial Conduct Authority and the Prudential Regulation Authority will publish new affordability rules to make sure customers are better able to repay their debts.

Short-term loans can pose a threat to financial stability because households take them less seriously than they do mortgages.

Consumer debts only amount to one seventh of the size of total mortgage debt, but they account for 10 times the amount of bad loans written off by banks, partly because it is easier to recoup mortgage debts by selling off repossessed homes than it is to recover loans for cars or personal spending.

The Bank told lenders to stress-test mortgage applicants’ finances to make sure they could afford their loans if they were charged 7 per cent interest – up from the 6.8 per cent interest in the current test.

A 2014 instruction telling banks to limit mortgages worth more than 4.5 times a borrower’s income will now be made permanent, the Bank said.