The Bank of England has highlighted serious concerns over a dangerous rise in personal loans, amid fears over its impact on the UK economy.
This isn’t the first time that the Bank of England has voiced worries about the rate of personal loans in recent months. Just last month, they warned financial institutes to tighten up their processes over fears that some staff are incentivised to lock borrowers into loans they can’t pay back; they also announced that these institutes must set aside a total of £11.4 billion over the coming 18 months, to mitigate the repercussions of bad loans.
However, the latest announcement from Alex Brazier, the Bank’s financial stability director, shows a hardening of those fears.
In a speech to the Institute for Risk and Uncertainty, at the University of Liverpool, Brazier explained that, over the course of a year, car loans, credit cards and personal loans have rocketed by 10%. Warning that by not addressing increased levels of borrowing, high street banks were entering ‘a spiral of complacency’ that was ‘dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.’
The Bank of England, already mindful of the last credit crunch, worry that this incredible rise in borrowing is unsustainable, leading to many unable to make adequate repayments. In short, the Bank of England fear another credit crisis.
While admitting that ‘household debt – like most things that are good in moderation – can be dangerous in excess,’ Brazier added:
‘Lending standards can go from responsible to reckless very quickly. The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy face – are actually growing.’
It’s thought that this rapid increase in lending is the result of the higher cost of living coupled with stagnant wages. So, we’ve reached a situation where, on the one hand, we’re all trying to tighten our belts in view of an ever-squeezed household budget – it’s already been reported that UK households are eschewing so-called ‘luxury’ items and focusing on ‘essential’ goods like food and fuel. But on the other hand, in order to maintain that basic standard of living, we’re fighting against rising prices by borrowing more.
So concerned are they over the danger of rising personal loans, that Brazier has confirmed the Bank of England are prepared to take further safeguards to protect consumers, businesses and the UK economy as a whole. The Bank is currently assessing the full impact of the current growth in consumer credit, and by September are expected to see whether institutes have tipped over from responsible to reckless, creating ‘any small gap in the line.’
‘If it has,’ Brazier said, ‘We’ll plug it.’
As recently as June, the governor of the Bank of England, Mark Carney, warned that banks has forgotten the lessons learnt in the wake of the previous financial crisis. And while it’s thought that the UK economy is now stronger than at any point prior to the last crash, Brazier’s speech marks a serious strengthening of an ongoing narrative from the Bank of England.