Banks in the United Kingdom are dialing back their credit underwriting and other extensions of unsecured debt as concerns are mounting that rising household debt could destabilize the financial system.
Newly released data from the Bank of England indicates that loans are declining and credit card applications are increasingly being denied as banks are shifting their efforts toward prime customers. The move comes after a warning by economist Mark Carney that annual growth of 10pc in lending could leave borrowers overextended and banks exposed. Banks have responded by dialing back — 12 percent more banks are reporting falling access to funds as opposed to greater access to funds, a strong indication the consumer credit market is slowing down.
Consumer groups are pleased, generally, with the choice, but would prefer to see consumers limiting themselves, rather than financial institutions being relied upon to tap the breaks.
“Given these trends, these figures showing reduced lending are welcome. However, we are all-too aware that reducing the supply of credit is not the same as reducing demand,” said Jane Tully from the Money Advice Trust, which runs the National Debtline. "The reality is that many households are seeking credit simply to make ends meet, with slow wage growth and rising prices adding to the pressure on already stretched household budgets."
The concern over risk and lending has been an ongoing concern for the last five consecutive quarters and is expected to carry forward into 2018. Credit scoring has also tightened in the last year, and consumer borrowing behavior seems to be shifting as customers are applying for fewer loans.
“The Bank of England has warned that banks risk becoming complacent in their lending behaviour, so it should take some comfort from banks reportedly tightening their lending standards for granting unsecured consumer credit," noted Howard Archer at the EY ITEM Club.
The U.K. move mirrors a similar effort that may be coming soon care of the European Central Bank, which has indicated its intent to slow down bond repurchases and reduce stimulus so that the credit market does not overheat.