The Bank of England’s Prudential Regulation Authority (PRA) is to ask major motor finance lenders to estimate the impact on financial performance and capital from a fall in used car prices, and to share the results with it.
The PRA said it wanted to be sure that lenders were assessing the ability of their books to withstand a significant downturn in used car prices due to their exposure to prices resulting from the guaranteed future values (GFVs) offered in PCP deals.
Overall, the PRA said gross GFV exposure is estimated to be around £23bn across the industry, with GFVs typically set in the range of 85-95% of the vehicle’s expected future value.
It said: “PCP’s written at the high end of this range are particularly exposed to a significant downturn in the used car market, possibly outside of historic experience (used car prices fell by up to circa 20% in the crisis, before recovering).”
It added that an initial fall in prices could lead to a surplus of used cars coming to the market, which could further weaken prices and cause material losses to lenders through their GFV risk.
Beyond worries around GFVs in PCP deals, the PRA also said it was requesting evidence from lenders that their credit-scoring adequately captures medium-term risk, especially at the current point in the economic cycle when customers’ credit performance may have been supported by a benign economic environment.
It will also be looking for evidence that stress-testing approaches do not under-estimate potential downturn risks by placing too much emphasis on the current point-in-time arrears rates of the portfolio, and that any loss leader segments are explicitly reported and monitored.
The PRA wants to make sure a borrower’s total debt is taken into account in the underwriting process and that the Consumer Credit Sourcebook is interpreted ‘prudently’ in underwriting.
Finally, the PRA will request evidence from firms that their risk appetite and governance frameworks are sufficient to oversee consumer credit portfolios, including controls embedded to prevent unintended drift in underwriting, overall asset quality or pricing-for-risk standards, and board oversight of this.
In addition, the Bank of England plans to bring forward the assessment of stressed losses on consumer credit lending in the Bank’s 2017 Annual Cyclical Scenario stress