High levels of personal debt threaten the economy by making banks more vulnerable to downturns, a Bank of England official has said.
In a speech to the University of Liverpool’s Institute for Risk and Uncertainty, Alex Brazier outlined the dangers posed by increasing amounts of household debt.
Mr Brazier, the Bank’s financial stability director, said high levels of credit card debt and personal loans make banks more vulnerable to downturns because borrowers are more likely to default.
He said high levels of mortgage debt make downturns deeper because consumers tend to cut back on spending in order to keep up repayments. “Household debt – like most things that are good in moderation – can be dangerous in excess,” he said.
“Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.”
Mr Brazier said lending has grown in line with the economy over the past two years and consumer debt levels are no higher relative to incomes than they have been for 20 years.
But, he said, consumer credit has been growing rapidly. Outstanding car loans, credit card balance transfers and personal loans have increased by 10% in the past year while household incomes have gone up only by 1.5%.
Mr Brazier said lenders can end up in a “spiral of complacency” in periods of good economic performance as they reduce prices and loosen lending criteria.
As credit becomes cheaper, it’s taken up more widely and serviced more easily.
“The spiral continues, and borrowers rack up more and more debt,” said Mr Brazier.
“Lending standards can go from responsible to reckless very quickly. The sorry fact is that as lenders think the risks they face are falling, the risks they - and the wider economy – face are actually growing.”
Mr Brazier said the Bank of England is putting in place defence lines to guard against the spiral of complacency and protect the wider economy.
These include pro-active supervision of banks and building societies, regular stress-testing of lenders and the restriction of high loan-to-income mortgage lending.