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The rapid growth in consumer credit in the UK is being helped along by longer interest-free offers on credit cards, according to the Bank of England.
Longer interest-free period and an increase in loan limits are contributing to the fastest rate of expansion in consumer credit since 2005, the BoE’s Financial Policy Committee said on Tuesday, with expansion particularly apparent in dealership car finance.
The FPC is more concerned about what this means for lenders than for the wider economy because, in the committee’ view, the scale of losses on consumer credit in a downturn was likely to be greater than that on mortgage lending.
Interest-free offers on credit cards are particularly problematic as the FPC said banks can account for them by recording income based on estimates of future customer behaviour and repayment — “which was uncertain”.
“The recent rapid growth in consumer credit could principally represent a risk to lenders if accompanied by weaker underwriting standards,” it said.
The BoE’s Prudential Regulation Authority has already launched a review of new lending across credit cards, personal loans and dealership car finance.
The committee’s comments come as UK regulators are increasingly concerned about the effects of increasing consumer indebtedness.
On Monday the Financial Conduct Authority said it was planning on making lenders waive interest repayments for the most indebted.
Risks to the UK’s overall financial stability remain elevated — an unchanged assessment by the BoE.
The FPC repeated that it “remained committed to the implementation of robust prudential standards” for banks. This is despite increasing calls for deregulation around the world in the wake of the Brexit vote and the election of President Trump.
With the UK’s Brexit talks looming, the central bank is “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 under review banks’ capital requirements in light of expected changes coming from both global banking standard setters in Basel, and a sweeping accouting change that will take effect next year.
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