As reported earlier, UK household debt levels are now running close to their pre-crisis values. The UK is sailing uncharted and probably stormy waters as it edges ever nearer to leaving the EU with no guarantees about the trading relationship with its major export partner. A betting man would suggest that economically, things are set to get worse. Inevitably, this could see higher interest rates and borrowing costs in a bid to calm inflationary pressure, but it may also lead to a recession with potentially significant job losses as UK based, European and global firms come to grips with the new reality. Such an eventuality would lead to an upswing in bad loans (i.e. loans that the customer cannot repay).

The Bank of England is taking action against the threat of rising defaults by demanding that UK banks increase their liquidity to the collective tune of £11.4 billion over the next 18 months, with a provision of £5.7 billion required over the next 6 months. The Bank is concerned that financial institutions have become to cavalier in their lending which is ironic as central banks were keen to drive up borrowing in the aftermath of the global financial crisis as a mechanism to boost economic growth! The terse warning from the Bank of England’s Financial Policy Committee noted: “Lenders may be placing undue weight on the recent performance of loans in benign conditions”. Consumer credit in the UK (credit card debt, loans and car finance deals) has spiked by 10% over the last year.

In contrast to exposure to bad mortgage loans, banks are at higher risk from consumer credit defaults because in the former case, homes can be repossessed and sold (even at a loss) more easily than the assets purchased through consumer credit which may have little or no residual value (for example where a holiday was paid for by credit card). The Bank of England will also tighten regulations on affordability criteria for mortgages and loans in a bid to ensure that consumers can afford to repay their loans – after all, the trigger for the Global Financial Crisis was the sub-prime mortgage market.

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