The Bank of England’s (BoE) Financial Policy Committee (FPC) has said that lenders are creating pockets of risk by placing too much weight on recent benign conditions.
Making the comments in a statement from its policy meeting on 20 September 2017, the BoE noted that the overall credit quality of consumer credit has improved significantly since the financial crisis. This was partly the result of calm macro-economic factors over recent years, it said.
The FPC has judged that lenders overall are placing too much weight on the recent performance of consumer lending in these benign conditions as an indicator of underlying credit quality.
It said: “As a result, they [lenders] have been underestimating the losses they could incur in a downturn.”
The BoE said it did not believe consumer credit was currently a material risk to economic growth.
It was, the bank said, a risk to banks’ ability to withstand severe economic downturns, as consumer credit was ‘disproportionately’ more likely to default.
The statement said that despite consumer credit only making up 1/8th of mortgage debt, it also generated 60% greater losses in the 2016 stress tests of major banks than those on mortgages.
The BoE Cited a Prudential Regulation Authority (PRA) as evidence that lenders were reducing interest margins and risk weights association with consumer loans, while beginning got increase lending to higher-risk segments. It also said it found major banks had underestimating loses in a severe stress in this year’s stress test.
In June this year the BoE’s FPC issued a similar warning to today’s announcement.