Consumer Lending Reaches Worrying High

The latest figures from the Bank of England show that consumer lending in the UK has reached its highest level since 2006, prompting warnings that should nothing change, the Bank may be forced to intervene.

The Bank is expected to release a statement later today, saying whether or not they will be taking action and imposing some form of restrictions of lenders in order to regulate the economy and avoid a large scale debt crisis.

The rate of consumer lending in general has gone up by 8.2% in the year to October, with ëloans and advances ‘ in particular going up by a record 9.6%, reaching a decade high.

We already had warnings just last week from Any Haldane who commented on the surge in credit card use and, in particular, cheap personal loans had led to credit use in general increase at “a rate of knots.”

As a result, the Bank is to closely examine its policies that are intended to safeguard against boom/bust trends and bubbles in order to assess whether or not action must be taken and if so, what kind of action that should be.

It would be the first time that the appropriate measures, called ëcountercyclical buffers ‘ would be used to force banks to boost their capital. The Bank will have a choice between implementing these kind of industry wide measures, and just focussing on problematic areas like mortgage lending.

Pantheon economist Samuel Tombs is in favour of the latter, but did not expect either option to be taken up this week. He said “consumer credit has picked up, but the ratio of unsecured credit to household incomes is very low.”

Peter Hutton at StepChange however feels that some kind of action, or that at the very least, the lenders must start taking more responsibility. He quite rightly expressed worry that these lax lending practises are exactly what led to the crash of 2007-08, and that we must be careful to not let history repeat itself.

He said: “it is vital that responsible lending standards do not relax at a time when many households are still financially vulnerable, otherwise we risk repeating the mistakes that led to the large and unsustainable credit balances we saw in the run-up to the financial crisis. The consequences of these mistakes continue to cause problems today and must not be allowed to happen again.”

Part of the responsibility for this boost in lending has been placed on the Bank themselves, who have kept interest rates low at 0.5% for quite some time now, and are not likely to increase until late 2016.

However, part of the boost in cheap lending has also emerged as an unintended consequence of various official bodies ‘ efforts to boost competition among banks and credit card suppliers whose deals have been improving to the point that they have now, in some cases, become worryingly cheap.

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