Opinion: BoE cannot continue to tolerate lenders asleep at the wheel

Lenders are getting lazy, yet the Bank of England only seems to act when things threaten to collapse.

The Bank of England announced this week that it would be increasing its scrutiny of what banks, building societies and lenders are up to.

It follows a study by the Prudential Regulatory Authority (PRA) on the state of the credit market, which threw up a series of serious concerns.

For example, it suggested that lenders’ assessments and pricing for risk are “overly influenced” by the current benign economic environment and historically low arrears rates.

In addition, rising indebtedness among their customers – and the impact that additional level of debt has on their ability to repay new lines of credit – is “not always fully considered” in a firm’s assessment of risk.

Not only are some forms of credit ignored at the underwriting stage, but firms fail to monitor their existing customers’ debt levels.

Just to throw a little further uncertainty into the mix, the PRA report also pointed out that risk management and controls “varied considerably” between firms, as did management information.

While the PRA argued that the extraordinary growth in the credit market is not a result of firms relaxing their underwriting standards, it did suggest that in order for firms to hit their targets they may be inclined to do so.

Lenders now have until September to prove to the authorities that they aren’t overstretching themselves.

It’s worth remembering that just last week, banks were ordered by the Bank of England to increase their capital buffers by £11.4 billion in order to make them more resilient as they currently have “less capacity to absorb losses”.

All of this follows reports earlier this year that a looming sub-prime crisis within car finance may be pushing us towards the next financial crash, with rising defaults and lenders failing to actually verify income before handing over loans. For more read Sub-prime loans: could cars cause the next financial crash.

How credit is booming

The nation’s use of credit is rising, and rising fast. Consumer credit grew by 10.3% in the 12 months to April according to the Bank of England, which it described as “markedly faster” than normal growth.

Analysts at the Trades Union Congress (TUC) reckon that average household debt will hit a new record high next year. The average household had debts of £13,200 at the end of 2016, which will hit £13,900 this year, £14,300 next year and keep rising until reaching £15,400 by the end of 2021.

Frances O’Grady, the TUC’s general secretary, said: “We’ve got this problem because wages haven’t recovered. Credit cards and payday loans are helping to prop up household spending for now, but millions of families are running on empty.”

The wage situation is certainly a worry. Average wages have dropped in real terms for the first time in three years according to figures from the Office for National Statistics, and with inflation expected to continue to rise, that will only get worse.

Stephen Clarke, an analyst at the Resolution Foundation think tank, has predicted that this decade will be “the worst in 200 years for pay packets”.

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Stop me if you think that you’ve heard this one before

I don’t know about you, but I’ve got a dreadful sense of deja vu at the moment.

Lenders failing to ask the right questions, to take into account all the facts when they determine who to lend to, and being utterly blasé about the risks of those borrowers falling into the red. Without being alarmist, we’ve been here before – and it really wasn’t that long ago either.

Ten years ago, I was a couple of months into life as a financial journalist, having started work at a magazine for mortgage brokers.

I didn’t have the first idea about mortgages but keen to learn I read up on what was happening with home loans across the world. And there were regular articles about things starting to get a bit ropey over the pond.

When I mentioned this to contacts in the industry, I always got the same response. “Don’t worry,” they said, “it’s a completely different market over there”.

A couple of months later, after Northern Rock hit the skids, I asked those same people about whether this was just the start for the UK market. “Don’t worry,” they said, “it’s just Northern Rock that is like this”.

Back then, I think people in high places were arrogant about how good their own businesses were, ignorant of the world outside their own little bubble and lazy when it came to properly assessing borrowers.

The mortgage market appears to have got its house in order since then, but it’s staggering that those same attitudes seem to be reappearing in other forms of credit.

Clearly, the Bank of England today is a lot more proactive than it was in the last financial crisis. But it still isn’t active enough, only seeming to step in when the warning signs become too grave to ignore.

It seems to me that lenders seem only too happy to act like school children, constantly testing the limits of their teacher’s patience, seeing how much they can get away with before teacher steps in.

So long as the Bank of England continues to behave like a struggling supply teacher, only acting when things really threaten to get out of control, that will remain the case. And that’s just not good enough.

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