Lenders ‘underestimate’ risks of consumer debt, says Bank of England

Lenders are underestimating the hit they would take from consumers defaulting on debt in a downturn, according to the Bank of England.

The Bank’s Financial Policy Committee (FPC) said there were “pockets of risk” in the current level of lending on loans, overdrafts and credit cards.

It estimated that in a “severe downturn”, UK banks could incur losses of £30bn.

That is the equivalent of 20% of UK consumer credit loans.

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The conclusions were aired in a statement published on Monday following the FPC’s meeting on Wednesday.

The Bank has consistently expressed the need for vigilance over growth in the consumer credit market during “benign” economic conditions.

This was repeated, although the FPC said it was relevant for the banks’ resilience in an economic downturn, rather than a threat to the economy as a whole.

“This is not a material risk to economic growth, as consumer credit represents only 11% of overall household debt,” the statement said.

Earlier this summer, another of the Bank’s arms – the Prudential Regulation Authority – ordered banks to address specific concerns about their treatment of consumer credit. The Bank had also told lenders to beef up their finances against bad loans.

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