BANKS seeking repayments of loans from troubled borrowers could produce a domino effect of householders defaulting on their debts, according to the Bank of England.
In its latest Financial Stability Review, the Bank says “a minority of households” have borrowed so much that they may struggle to meet future debt repayments, even if there is no wider instability such as a rise in unemployment. They have been able to take on too much debt because banks give them credit cards without checking how many they already have.
The report describes the risk of a chain reaction in which all the loans are unravelled if banks act too quickly to reduce the amount of credit they give. It says that one bank trying to cut back a loan could cause a household to go into arrears on other borrowing, which would damage competitor banks.
“Were a lender to fear that its competitors would act pre-emptively at the first sign of stress, the lender is less likely to exercise forbearance itself,” the report says. “There is therefore a potential co-ordination problem.” However, “signs of stress are limited” and the risk of an unco-ordinated response to debt is therefore not urgent.
The Bank also voices concern about the insolvency rate, which has risen to about 30 per cent above its peak in the early 1990s, despite more stable economic conditions.
Advertisement
It also notes that the proportion of mortgages that were three to six months in arrears rose in the second half of last year, although from low levels.
Given that the housing market will now “probably remain subdued”, the Bank says that the pressures on households from mortgage debt may rise.
But the latest report is broadly upbeat, saying that risks of default remain low and volatility internationally is subdued.
Sir Andrew Large, the Bank’s Deputy Governor, said: “The near-term outlook for the UK financial system is generally healthy. There are, however, some concerns on the horizon. For example, there are signs that areas of credit risk may be underpriced, and the liquidity of some assets could prove illusory in stressed conditions.
“But UK banks’ profits, capital and liquidity suggest that they would be resilient even if unexpected stresses did arise.”
Advertisement
Households’ total debt is now close to 150 per cent of total post-tax income, the Bank notes, although more than two thirds of that is secured in the form of mortgages.