Banks tighten up consumer lending, BoE credit conditions survey finds
UK banks have tightened up consumer lending, the Bank of England confirmed on Thursday, as speculation continues that an interest rate rise is looming.
During the second quarter of 2017, the Bank's credit conditions survey found availability of unsecured credit to households decreased, and is expected to decrease further in coming months due to a reduced appetite for risk.
Secured lending supply increased in the second quarter but lenders expect availability to fall slightly over the next three months to mid-September, again due to risk appetite.
Demand for mortgages was reported as unchanged as a significant decrease in buy-to-let lending was counterbalanced by a rise in prime lending. Banks and building societies expected house purchase lending to increase in the third quarter, driven by a rebound in buy-to-let and a slight increase in prime.
With house price expectations reportedly helping to marginally improve credit availability, economists suggested this meant lenders see little immediate risk of a house price correction.
Demand for credit card lending was reported to have increased slightly and is expected to be unchanged in the coming quarter.
Corporate demand increased from small and medium-sized businesses for the first time in a year, while for large business decreased significantly and is expected to continue falling.
Economist Howard Archer at the EY ITEM Club said that given the BoE's heightened concerns over the risks to the UK economy from increased consumer borrowing given the weakened economic outlook and squeeze on consumers’ finances, it will comforted that lenders are adopting a more cautious approach.
“Further evidence that banks are becoming more cautious in their lending is that fewer secured loans are expected to be made in Q3 to borrowers with loan to value ratios of more than 75%, and particularly more than 90%," Archer noted.
“The Bank of England will likely see the report as indicating that lenders are moving in the right direction in their lending to consumers, but that pressure must be maintained on banks to act responsibly especially.
He noted the need for increased bank caution, with the survey reported that default rates on both credit card and other unsecured lending to households increased significantly and are expected to increase further on credit card lending in the next quarter, though bank losses on defaults were reported to be unchanged on both credit card and other unsecured lending.
Earlier this month, the BoE's Financial Policy Committee ordered banks to increase their countercyclical capital buffer, lifting its recommended CCB back to 0.5% from zero after cutting it a year ago, to increase the capital that banks have to hold against their loan portfolio.
The FPC will increase it further to 1% in November, providing there is no change in the economic outlook.
The FPC also revealed it has told banks and other lenders they need to test whether borrowers could still afford their mortgages if interest rates are lifted by the three percentage points.