The Bank of England has handed UK lenders a deadline to show they are adequately protected against consumer credit risks as borrowing continues to soar.
While its Prudential Regulation Authority (PRA) – which has powers to force credit curbs on banks – did not outline any new rules, it said lenders would have until September to demonstrate they had not overstretched themselves.
Banks have been keen to lend because their profits been under pressure from record low interest rates.
The PRA’s review of the consumer credit market was released just a week after the Bank reintroduced so-called countercyclical capital buffers to ensure banks have reserves to cope with any economic slowdown or sudden shocks.
The Bank had reduced the buffers to zero last July after the Brexit vote in a bid to maintain lending to households and businesses.
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But there are growing concern that consumers – and banks alike – have taken on too much at a time when the economy – largely driven by consumer spending since the financial crisis – is stuttering.
The PRA said risks poor credit scoring, credit card promotions and the explosion in car finance loans and industry assumptions around vehicle resale values.
The review found: “In an environment of rapid growth in consumer credit, interest margins have fallen and there was evidence of weakness in some aspects of underwriting, so lenders are more vulnerable to losses in stress.”
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Consumer borrowing has been growing at an annual rate of 10% while household savings rates are near rock bottom lows.
There are fears the situation will only intensify, given household budgets are being squeezed by rising inflation and weaker wage growth. There is also growing evidence businesses are putting off investment amid the economic uncertainty.
This is not the first time banks’ lending practices have come into sharp focus since the financial crisis.
The Bank of England has already tightened mortgage lending criteria while it said in March that its latest stress tests would include a drop-off in foreign investment scenario to gauge the potential for further Brexit-related trouble.
The PRA said on Tuesday that UK lenders appeared to be relying too heavily on the assumption that the economy would remain healthy with low levels of arrears.
The regulator said it would tell lenders to fix any areas found to be weak and it could introduce measures across the consumer credit sector if weaknesses are found to be widespread.