Bank of England warns of 'spiral of complacency' around mounting consumer debt


Families piling up too much debt pose a risk to 'everyone else in the economy, ' the Bank of England warned last night.

He warned banks and other lenders could be dicing with a "spiral of complacency", thinking they can reduce prices and loosen lending criteria.

Alex Brazier, the bank's director for financial stability, said outstanding vehicle loans, credit card balances and personal loans had increased by 10% over the past year, while household incomes had risen by only 1.5%.

Terms and conditions on credit cards and personal loans have become easier, and lenders' own assessments of how risky these loans are, and which they use to calculate how much capital they need to withstand losses, have fallen.

"Lenders have been the lucky beneficiaries of the benign way the economy has evolved", he said in a speech at the University of Liverpool.

The Bank of England has told credit card companies, banks and vehicle loan providers that they are at risk due to irresponsible lending. Mr Brazier said firms risk losing out if used auto prices fall because PCP buyers would hand vehicles back after three years rather than buy them outright, which would force prices down even further.

"The finance company is left with a vehicle that has depreciated by more than they've been paid", Brazier said.

Brazier highlighted vehicle loans, saying so-called personal contract purchase or PCP from the finance arms of automakers now finance nearly four in five new auto purchases.

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These "defence lines" are likely to involve banks setting aside more capital to protect themselves in the event of future economic shocks, but Brazier said that more details would be available in September, after the Bank had completed its analysis.

He added that developments in mortgage debt had been much less striking than those in consumer debt and vehicle finance, with lending for home loans up by just 3 per cent over the past year. "Over the past two years the share of lending at loan to income multiples above four has increased from 19% to 26%".

The Bank of England's concerns have been echoed by comparison website, which reports that one in four people are now applying to borrow half their annual income as loan requests continue to rise.

Brazier said high levels of mortgage debt can make downturns deeper by causing consumers to aggressively cut back spending in order to service their mortgages.

These include supervision of the banks and building societies, stress testing to make sure they could cope in recession without cutting back lending, and affordability tests on mortgage lending to limit loan to income levels.

This has been the strongest warning yet about the possibility of their being another financial crisis.

In a speech in Liverpool Alex Brazier an executive director with the Bank of England said with PCPs accounting for 80% of new auto sales carmakers carried the can if vehicle values started to fall. In this country alone, close to a million jobs were lost and more than 100,000 businesses failed.