Bank of England: UK banks ‘underestimating’ risks of growing consumer debt

RBS postpones launch of new low-interest credit card

UK banks will now need to set aside an extra £10bn to cover potential consumer credit losses after the Bank of England (BoE) warned that lenders are “underestimating” the risks of growing household debt.

The observation comes from BoE’s Financial Policy Committee (FPC) which published its report from the latest meeting stating that while climbing debt levels do not pose any immediate risks to the UK economy, the banks, however, are in a more precarious position. 

“Within a benign overall domestic credit environment, there is a pocket of risk in the rapid growth of consumer credit. This is not a material risk to economic growth, as consumer credit represents only 11 per cent of overall household debt. It is a risk to banks’ ability to withstand severe economic downturns,” the FPC said in a statement.

A report in Guardian states that the shares in UK banks and insurers dropped this morning amid a warning that a recession could create £30bn of consumer credit losses.

The committee also said the lenders have placed too much weight on the recent performance of consumer lending in benign conditions, which has seen default rates fall. As a result, lenders “have been underestimating the losses they could incur in a downturn”. 

In a related development, Royal Bank of Scotland (RBS) has announced postponing the launch of a new low-interest rate credit card stating fears over increasing consumer debts in the UK.

RBS was supposed to launch a new card with lower rates than its standard cards, but its CEO, Ross McEwan, said today that the bank does not think “now is the right time, with consumer debt having grown so much.”

This move of RBS comes just before Labour’s shadow chancellor, John McDonnell, is set to propose a cap on credit card interest repayments during the party’s Brighton conference today.

Consumer borrowing has reportedly increased by more than 10 per cent a year over the last few years and the household savings rate hit an all-time low at the beginning of this year, raising concerns about consumers’ ability to pay back the large amount of debt that has been accumulated.