Alex Brazier, Executive Director (Financial Stability) at BoE has delivered a speech in which he considers the recent developments in household debt, how that debt can pose dangers to the wider economy, and the three lines of defence put in place by regulators to guard against those dangers.
Mr Brazier observed that in the past two years, lending has grown in line with the economy and the level of consumer debt is no higher relative to incomes than it has been on average in the past twenty years. But within this overall picture, consumer credit has grown very rapidly. In the past year, outstanding car loans, credit card balance transfer and personal loans have increased by 10%, while household incomes have risen by only 1.5%. This trend can also be seen in the mortgage market, with lenders increasing lending at higher loan-to-income multiples.
In light of this, BoE is putting in place a rigorous defence system to guard against negative changes in the consumer credit market, including:
- pro-active supervision of the banks and building societies.
- regular stress testing of lenders to make sure they have the strength to deal with very severe recessions without cutting back their lending.
- restrict high loan-to-income mortgage lending, with borrowers subject to an affordability test that effectively varies their loan-to-income limit for their individual circumstances.