Long interest-free periods on credit cards and an increase in loan limits are contributing to the fastest rate of expansion in consumer credit since 2005, the Bank of England has said.
The BoE’s Financial Policy Committee, which monitors risks to UK financial stability, warned on Tuesday about the risk to banks of offering unsecured loans on easy terms.
The committee is particularly concerned about interest-free offers because of the way banks account for them: banks can record interest income, even in the interest-free period, based on estimates of future customer behaviour and repayment. The FPC said that such forecasts were “uncertain”.
“The recent rapid growth in consumer credit could principally represent a risk to lenders if accompanied by weaker underwriting standards,” the FPC said.
The FPC cited long interest-free periods when moving balances on to new credit cards and higher maximum loans as examples of easier conditions that have helped push consumer credit to an annual growth rate of 10.9 per cent.
While consumer credit accounts for a much smaller proportion of bank lending than mortgages, the FPC estimates that consumers are more likely to default on credit-card repayments in a downturn. Last year, UK banks had £19bn of impairments on credit cards, compared with £12bn on mortgages.
The FPC’s intervention is the latest salvo from UK regulators about rising levels of consumer debt: 3.3m people are judged to be in “persistent debt”, where the minimum repayments go towards interest and charges, rather then reducing the principal amount borrowed.
The Financial Conduct Authority said on Monday that lenders needed to do more to help customers struggling with credit card debt. It proposed that in the most severe cases, interest repayments and other charges should be waived.
Borrowing on credit cards is the most common form of non-mortgage debt in Britain and a quarter of households have outstanding balances that they do not pay off at the end of the month, according to the Office for National Statistics. Half of those households have at least £1,700 outstanding.
Credit card debt in the UK hit a record £67.3bn in February, surpassing pre-credit crisis levels.
In its wider assessment of the UK economy on Tuesday, the FPC said that the risks to the UK’s financial stability remained high, unchanged from its last quarterly review.
It repeated that it “remained committed to the implementation of robust prudential standards” for banks, despite calls for deregulation around the world following the Brexit vote and the US election.
With the UK’s Brexit talks looming, the BoE said it was “alert to the potential for greater complexity in firms’ business structures to reduce the resilience of the UK financial system and was examining appropriate mitigants”.
It added the FPC could keep banks’ capital requirements under review in light of expected changes from both international regulators in Basel, and a sweeping accounting overhaul that will take effect next year. The reforms force lenders to make provisions on their balance sheets for expected losses, rather than actual losses already suffered.
Additional reporting by Gemma Tetlow
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