A warning from the Bank of England last week that the banking sector could lose as much as £30bn in unpaid debt from credit cards, personal loans and car finance if interest rates and unemployment were to rise sharply was only the latest shot across the industry’s bows.
During the summer months individual central bank executives made speeches to that effect and the main consumer finance regulator has talked about tackling the worst excesses of the loan business.
The conclusion must be that policymakers are well aware of a potential consumer-lending bubble and we can all sleep soundly in our beds. However, in offices around London’s Old Street station, e-finance entrepreneurs are mulling over the metrics behind consumer lending and the way technology can allow high street banks and a new breed of “fintech” firms to target juicy opportunities.
In this market, “opportunities” is another word for a class of customer who has found themself excluded from cheap credit by outmoded, outdated, old-fashioned thinking.
It raises the question: who are the regulators watching when they tell us all is well? The usual suspects is the answer – which is distressing, to say the least.
From the bankers’ standpoint, it is easy to see why the best brains are being put to use thinking up ways to expand consumer credit. While ultra-low interest rates and state subsidy in the form of help to buy have supported home-loan lending, the mortgage market is operating under strict rules.
The financial crash of 2008 was a tale of sub-prime mortgages sold to poor people and resold to investors in a complex web of derivatives that few understood. When a few banks pushed things too far, mostly in America but with the UK’s Northern Rock among them, the regulators determined that most of the debt couldn’t be verified and was therefore worthless.
Ten years later, it is difficult to sell a mortgage to anyone who cannot supply a 10% deposit and provide guarantees of permanent employment. There is a limit to the number of people who can satisfy this demand, especially when the government’s austerity measures and only modest business investment have spawned an economy based on insecure employment, while the failure to build new homes has forced thousands into rented accommodation.
How can a bank generate loans to the under-40s when so many appear to have little in the way of secure employment, or mortgage equity, or both? The UK has already seen a rise in self-employment to 15% of the workforce. More than a million women have joined the workforce in England since 1996, many of them with little credit history. Within a decade, 40% of households could be in rented accommodation.
What a bank can do is turn to the physics graduates who developed the systems that brought the financial world to its knees in 2008 and ask them to be innovative again.
Few will be surprised to learn that Goldman Sachs is a leading light in the search for ways to lend to US consumers. Like so many of its rivals, the firm has spotted the self-employed consultant – a group whose numbers are growing, and who have struggled under existing lending rules to secure credit – as a target for cheap loans.
Upstart credit ratings agencies are developing software that can discern which consultant is worth enticing with a flexible loan and which is not.
Goldman Sachs is these days not so much a bank as a technology company. Hundreds of online retailers could soon be offering loans to buy their goods using digital purses or even digital currencies.
In the US, the number of people taking out unsecured loans jumped more than 15% to 15.8 million in 2016 from 13.7 million a year earlier and is now at the highest level since 2009, according to credit data agency TransUnion.
In the UK, consumer credit has been growing at 10% a year for the past three years, while the mortgage market has flatlined.
Of course, the banks and the hundreds of fintech firms playing the credit game should be wary given the regulator’s warnings. They should, but they won’t be. There is so much money in play, given to them by global savers in bucketloads. And there is the securitisation market.
Just as happened in the early 2000s, loans are increasingly resold in packages, or securities, for investors to buy. The mortgage-backed securities market was at the heart of the last crash. Will a securities market based on consumer loans be at the heart of the next?
Once the high street banks and a new breed of players targeting the young, old, poor and self-employed have sold on the loans, they will have little reason to care whether customers default. It means that when they recycle the next bunch of loans through the money markets they can extend their reach beyond the most secure lending risks, knowing someone else in the chain will pick up the tab if something goes wrong.
Christine Lagarde, managing director of the International Monetary Fund, recognised the trend in a speech on Friday. She said that regulators were capable of spotting credit trends and keeping lenders in check. Unfortunately, their efforts last time were found wanting and the suspicion must be that they will again.