Rising consumer credit 'dangerous for everyone'


Rising consumer credit 'dangerous for everyone'

Standards can go quickly from responsible to reckless'. Losses to those companies - however painful for them - are much less significant for the wider economy than losses at banks.

"And to make sure this defence line is kept robust in the face of rapid consumer credit growth, we are accelerating this year's test of banks' consumer credit loans". Countries with higher levels of debt can therefore have more vulnerable banks and deeper recessions.

"Household debt - like most things that are good in moderation - can be unsafe in excess", Mr Brazier said.

Brazier said, in a speech in Liverpool late on Monday, that: "Household debt - like most things that are good in moderation - can be unsafe in excess", and that the current trend was "dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy". Companies risk losing money if used auto prices fall and Brazier said banks involved and the shareholders of vehicle companies would "want to think very carefully about the risks".

"But if used auto prices were to fall, the PCP purchaser has every incentive to give the vehicle back after making the monthly payments, skipping the final balloon payment and instead buying the same auto from a used auto dealer for a lower price".

"The advent of PCP means - as the small print always says - the past may not be a good guide to the future".

He said that in the past two years, lending has grown in line with the economy: credit supply looks neither too cold - as it has been for much of the past decade - nor too hot - as it was in the build-up to the financial crisis. Those consumers who took out PCPs tended to have higher incomes and savings.

In the past year, vehicle loans, credit card balances and personal loans had increased by 10 per cent while incomes had risen by just 1.5 per cent.

Within this overall picture, however, he said, consumer credit had been growing very rapidly.

The Financial Policy Committee member is now anxious that the current period of strong economic performance and low defaults could have plunged lenders into a "spiral of complacency". Then, as credit becomes cheaper, it is taken up more widely and serviced more easily. 'These are all classic signs of lenders thinking the risks are lower, ' said Mr Brazier.

In its toughest warning yet about the possibility of a rerun of the financial crisis that devastated the economy 10 years ago, Threadneedle Street admitted it was alarmed about the increase in the amount of money being borrowed on easy terms over the past year.

The average length of a zero per cent credit card balance transfer had doubled to around 30 months in recent years, while the interest on a £10,000 personal loan had plunged from 8 per cent to 3.8 per cent with barely any change in the official rate.

Brazier highlighted the lines of defence put in place by the regulator, including direct restrictions on high loan to income mortgage lending. "If it has, we'll plug it".