The Bank of England is to force banks to hold more capital in the face of rapid growth in lending on credit cards, car finance and personal loans.
The intervention by Threadneedle Street, which could amount to banks needing £11.4bn of extra capital in the next 18 months, is one of a number of measures intended to protect the financial system from the fast pace of growth in consumer finance.
In addition to increasing the capital requirements, the Bank said it was bringing forward the part of the annual stress tests on banks which scrutinises their exposure to consumer credit. This will now take place three months earlier, in September.
The Bank of England’s Prudential Regulation Authority and the City regulator, the Financial Conduct Authority, will also publish next month how they expect lenders to treat borrowers in the rapidly growing market.
The measures were announced in the Bank’s half-yearly assessment of risk to financial markets which also set out measures to rein in mortgage lending and highlighted the risks associated with the UK’s exit from the European Union.
While the Bank found risks to financial stability were neither “particularly elevated nor subdued” it warned that there “pockets of risk that warrant vigilance”.
“Consumer credit has increased rapidly. Lending conditions in the mortgage market are becoming easier. Lenders may be placing undue weight on the recent performance of loans in benign conditions,” the Bank said in the financial stability report.
All components of consumer credit have been growing faster than the rate of growth of the economy, at more than 10%. Within that car finance has been rising 15%, credit cards 9% and personal lending 7%.
The Bank calculates there is £58bn of car dealership finance, including £24bn from banks; £67bn in credit cards, including £52bn from banks; and £72bn in loans and overdrafts, of which £62bn originates from the banking sector.
Threadneedle Street is also keeping a close watch on mortgages, where lending is increasing by a more moderate 2.8%, but where there are signs of an increase in riskier lending, measured by the size of the loan to an individuals’ income.
Affordability tests are being tweaked so lenders must test that borrowers can afford a three percentage-point increase in their standard variable rate (SVR) – a rise to about 7%. This is tighter than the current requirement for a three percentage point rise in the base rate, which allows lenders some discretion by assuming they will not pass on the full rate rise in their SVR.
The Bank also said it would keep in place measures introduced in 2014 which limit high-risk lending to 15% of a lenders’ overall lending.
In March, the Bank highlighted consumer credit as a greater risk than buy-to-let mortgages. At the time, it said that banks had £19bn of impairments on credit cards last year, compared with £12bn on mortgage loans and launched a review into the credit quality of new lending.
The additional capital requirements come in two phases; a 0.5% rise in a special pot of capital known as a the counter cyclical capital buffer in June 2018 and another 0.5% the year after that. Each 0.5% increase amounts to around £5.7bn of extra capital in the system and does not necessarily mean banks will have to raise fresh amounts of cash but rather reallocate existing capital.
The FCA has announced a raft of measures to help people in credit card debt, including waiving or cancelling interest and charges if customers cannot afford to curb their liabilities through a repayment plan.
On Brexit, the PRA warned there were a range of outcomes and said it was continuing to “identify and monitor UK financial stability risks, so that preparations can be made and action taken to mitigate them”. Banks have been told to provide their contingency plans to the Bank by 14 July.