BOE warns about growth of U.K. consumer credit
The BOE's Financial Policy Committee, which spots risks to the stability of the financial system, said in a quarterly policy statement that speedy growth in consumer credit represents "a pocket of risk" in an otherwise benign borrowing environment.
The panel said that if borrowers were to default on 20% of the loans they've taken out, banks would be saddled with losses of around GBP30 billion ($40.5 billion).
Though recent growth in consumer credit isn't a risk to the overall economy, "it is a risk to banks' ability to withstand severe economic downturns, because this asset class is disproportionately more likely to default," the panel said.
Officials said they intend to look at the risks around consumer credit in more detail in upcoming stress tests for banks due late November.
On the global front, the FPC said risks to financial stability from heavy indebtedness and geopolitical tensions have risen since its previous quarterly outlook in June. Financial vulnerabilities in China remain pronounced, it said.
The panel said it is continuing to identify and monitor possible risks to the financial system from Britain's looming exit from the European Union.
Those risks include cross-border contracts, in particular insurance and derivatives; restrictions on sharing of personal data between the EU and United Kingdom; and restrictions after Brexit on cross-border banking, and asset management provision.
"Regulatory capital buffers for individual firms will be set following the full stress test results so that each bank can absorb its losses on consumer lending, alongside all the other effects of the stress scenario on its balance sheet," BOE said.
"The FPC also expects that banks will begin to factor these market-wide levels of stressed losses on consumer credit into their overall lending and capital plans.
"On 1 January 2018, most banks in the United Kingdom will need to adhere to a new accounting standard called International Financial Reporting Standard 9 (IFRS 9).
"Under the new accounting standard, banks will set aside provisions for expected credit losses on all loans, not just where a loan is past due or has already fallen into default.
Because provisions will be made in a more timely way, IFRS 9 "accounting will support financial stability." ■