The Bank of England is warning about the consumer credit boom it created

Yesterday saw a speech from a Bank of England policymaker that travelled the road we have been on for a year now concerning the issue of unsecured or consumer debt. However before we got to that Alex Brazier of the Financial Policy Committee found time to chant some central banking mantras.

Since then there has been a programme of repair and reform.

Britain’s households have paid down debt.

The financial system has been made safer, simpler and fairer.

Banks, in particular, are much stronger. British banks have a capital base – their own shareholders’ money – that is more than 3 times stronger than it was ten years ago.

They can absorb losses now that would have completely wiped them out ten years ago.

Only a banker would have the chutzpah to claim that the financial system is now simpler and fairer. Perhaps he has forgotten that speech from Sir Charles Bean saying that savers had to take some temporary pain that in the subsequent 6/7 years has looked in fact ever more permanent. There was however an interesting insight into what happened back in the day to Royal Bank of Scotland.

At Royal Bank of Scotland – the most egregious case – that illusion meant the bank could be toppled by losses of less than one per cent of its assets.

Best for Alex to move on from that one as after all it is an example of failed regulation as he tries to assure us that this time will be different. Before we move on however he seems to be confused as to who is the servant of whom.

Only once the puncture in the banking system was repaired was it able to get back to serving the economy.

The truth is that we have become the servants of the “precious”.

The problem of consumer credit

First we are assured that there is no problem at all really.

So Britain doesn’t have a high level of consumer debt. It doesn’t have a debt-driven housing market. And as we’ve seen, it doesn’t have rapid growth of credit overall.

It makes you wonder why he feels the need to discuss it at all doesn’t it? Of course we know what to think about official denials but I would like to draw attention to what the statement below does not say.

Since the financial crisis, helped by low interest rates, Britain’s households have reduced their debt.

It does not say that they paid it down for a while but that from 2013 with the Funding for Lending Scheme and last August with the Bank Rate cut to 0.25% and an extra £70 billion of QE ( Quantitative Easing) if we include the Corporate Bonds it has been quite clear that Bank of England policy was for them to borrow again. So net mortgage lending went from negative to positive and more recently consumer credit growth has surged.

The catch is that as we have regularly discussed on here if encouraged the British consumer soon revs up the engine.

In the past year, outstanding car loans, credit card balances and personal loans have increased by 10%. Household incomes have risen by only 1.5%.

With real wages and incomes under pressure from higher inflation that relationship seems set to get worse. We now get something which is breath taking if we remind ourselves again that the Bank of England has driven this with its circa £70 billion Term Funding Scheme.

On credit cards and personal loans, terms and conditions have become easier. The average advertised length of 0% credit card balance transfers has doubled to close to 30 months………..Advertised interest rates on £10,000 personal loans have fallen from 8% to around 3.8% today, even though official interest rates have hardly changed (Chart 10).

Only just over a month ago at Mansion House Governor Mark Carney declared this to be quite a triumph.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations, and unemployment has reached a 40 year low.

This is rather awkward for Mr.Brazier  so he blames the banks.

These are all classic signs of lenders thinking the risks are lower. ………Lenders’ own assessments of how risky these loans are, which they use to calculate how much capital they need to withstand losses, have fallen. Over the past two years, these ‘risk weights’ on credit card loans have fallen by 7% and those on other consumer loans by 15%

Shouldn’t we have something like a regulator to stop this?

In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions.

Actually of course the regulator is the same organisation which has encouraged and bribed the banks to do this.

Car Loans

This is an interesting way of describing the issue.

Car finance has drawn particular attention, with growth of 15% in the past year and more than 100% in the past 4 years.

A clear triumph for the Funding for Lending Scheme! Oh hang on probably best not to tell everyone that so lets look at this.

The Financial Conduct Authority, which regulates car finance, has expressed its concerns about a lack of transparency, potential conflicts of interest and irresponsible lending in parts of the car finance industry. It will explore and address those practices.

You may note that after 4 years of evidence our intrepid regulators are still only at the “explore” stage so what have they been doing? Well they can tell us move along please there is nothing to see here.

If those optional balloon payments are excluded, this car finance debt accounts for only 1.2% of aggregate household income,

Also as the risk is with the finance arms of the car manufacturers then as they are not banks frankly who cares? Certainly not those in Threadneedle Street.

The main risks are with the finance companies offering these contracts – typically arms of car manufacturers.

Unlike credit cards or personal loans, the lenders here are predominantly the finance arms of car companies. Their losses – however painful to them – pale in significance for the wider economy next to situations in which it’s the banking system making the losses.

After all they only make real things as opposed to the important job of sending pieces of imaginary paper around the financial system.


There is trouble here too.

Lenders have been reporting that their objectives to grow market share are pressing them to make credit more available

Ah excellent so they have been passing on the cheap money handed to them by the Bank of England in a “the cost of borrowing is near record lows” sort of way. But something which was completely predictable has “surprised” the Bank of England.

Boundaries are being pushed in less benign ways too. Lending at higher loan to income multiples has edged up. Over the past 2 years the share of lending at loan to income multiples above 4 has increased from 19% to 26% .

But this was fixed by a macroprudential policy announcement back on the 26th of June 2014 wasn’t it?

The PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5.

So 4 is the new 4.5 which is troubling in itself if you think about it in only 3 years. Along the way we see one of the problems with macropru in that it ends up chasing its own tail which of course is nobodies fault. Meanwhile the problem gets worse….


Alex Brazier is between something of a rock and a hard place here. This is because his boss the Governor of the Bank of England has declared the rising amount of credit as a triumph so warning of potential disaster has the danger of being career limiting. Perhaps being posted to a dingy basement office where the Bank of England tea and cake trolley never goes. However he deserves some credit ( sorry..) for raising the issue and in particular let me welcome this bit.

As mortgage debt expands, house prices rise. Lenders think borrowers have more valuable houses against which to secure mortgages.

And as terms and conditions ease up, it becomes easier to service debts. More borrowers get access to consumer debt and make their repayments. Credit scores improve,

The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing.


Yep so called triumph can head towards disaster. Also there is this.

Mortgage debt is high, in large part, because housing costs are high. Across the nation, the average house costs 4.5 times income

Yes, the problem is that house prices are too high. Also this has consequences for those who rent.

Those who rent in the private sector typically spend a third of their income on rent.

Except there are two problems here. Firstly it is the Bank of England which via its policies has driven house prices higher. Secondly there is a potential misrepresentation in “4.5 times income”, it gives the impression of individual income whereas in fact it is household income and you can bet that will be 2 full-time workers. It is of course much worse in London which is why people are leaving……



23 thoughts on “The Bank of England is warning about the consumer credit boom it created

  1. History repeating itself, lenders giving loans to people who can’t afford it so they can increase their ” market share” and not to SMEs who fuel employment and the economy. Consumers using credit to buy the latest “must have” which they can’t afford otherwise. Salaries and wages falling in real terms. Increase use of contactless and phone payments, ” so its not really spending, is it?” The banks are repaired and in a much better position to cope with any future crisis.
    So the B of E is monitoring the situation and occasionally shows some concern of the level of unaffordable debt.
    We have all said this before, it will end in tears and nobody is talking about it, let alone doing anything about it!

  2. Its like reading the Daily Mash the way you describe the BoE … lucky they’re not in charge of anything important ……….. oh wait!

  3. Great blog as always, Shaun.
    Brazier said in his speech: “So the safety of the economy needs a further defence line beyond the lenders…That line is REGULATION, a defence line that was, frankly, missing in action in the run-up to the financial crisis.” (My emphasis.) Even if he works on the FPC, and not the MPC, you would think he would at least acknowledge the possibility that monetary policy was too loose, partly due to an effective reduction of the target rate of inflation when the HICP replaced the RPIX as the target inflation indicator, partly due to a move to an inflation indicator that would not signal the need for a bank rate hike as house prices moved up. A pair of Canadian economists made the connection as early as 2008 (although David Laidler was British born and raised); it seems strange that one of the senior officials at the Bank of England still hasn’t made it nine years later:

    • Hi Andrew and thank you

      There is a convention that the two policy committees ( FPC & MPC) do not criticise each other. Whilst I can understand the logic of that it does create problems as you suggest. Let me add to the list as with the Funding for Lending and Term Funding Schemes the MPC has pumped up the bank and finance house lending that the FPC is now saying it is worried about! Actually the situation is even more complex as of course the permission of the Chancellor is required for these schemes. In my opinion we need clearer demarcation lines as for example which side is Governor Carney ( He is the one who meets the Chancellor and is on both the MPC & FPC) on?

  4. This struck me:”Mortgage debt is high, in large part, because housing costs are high”.

    This clearly sees causation as running from prices to credit whereas in truth it runs from credit to prices; a somewhat startling inversion but necessary in terms of self justification.

    It would be difficult to find another public organisation that created the conditions for its own problems and then tried to brush them off as being someone else’s responsibility. It is perhaps one of the most basic things in economics that if you reduce the price of something (debt) then people will demand more (houses, cars…) and to turn round after several years and declare surprise at all this really does take chutzpah of a very high order.

    • Bob,
      You can hardly expect a media controlled by the very people “behind the curtain” to highlight the absurdities, hypocrisy and shortcomings of central bank policies can you?

      The people I have seen openly and brazenly challenge the central banking system for what it is -downright fraud,counterfeiting and theft- are mainly Peter Schiff, Marc Faber,Alex Jones and Max Keiser. You can forget the last two as they come across as total fruitcakes on air, nobody seeing them would take them seriously. That leaves the first two, apart from You Tube videos and Zero Hedge, and the odd interview on Bloomberg/CNBC how would your average Joe hear what tthey had to say let alone understand it?

      All I get from people at work when I point out the disastrous policies of these central banks is “it doesn’t really affect me..” (most have no savings and massive mortgages.

      They don’t realise that if the Bank of England maintains its current policies of zero interest rates and high inflation and devaluing the pound for the next ten years(rule of 72), their wages and savings will have had their purchasing power halved in that time. I have tried to point this out to them, but they simply refuse to believe it, and as for trying to prove it with maths, you are simply wasting your time.

      These people think they can win the Euromillions jackpot, when I pointed out to them that following the increase in the odds to 140m/1 that only around five or six people in the UK will win a jackpot prize IN A YEAR, they said that they would still continue to do it!.So I then said so the odds don’t matter then? If they increased the odds to 500 billion to one would you still play it, wait for it….. “yes!!!” Their justification? “Well someones got to win it haven’t they?”

      And people on here and other blogs wonder why we have central banks and the political systems that protect them!!!
      I don’t.

        • Agreed Forbin,
          I just pray I get out of this madhouse in time to live abroad and watch the UK cities burn on my satellite or internet news feed when this country’s economy and currency totally collapse, I don’t think I will have to wait long .

          I will be watching corn futures on your behalf!

      • ‘All I get from people at work when I point out the disastrous policies of these central banks is “it doesn’t really affect me..” ‘

        It’s really saddening.Which is why I come here to be honest.Mix amongst some people who undertand and think it’s important.

  5. Shaun, I marvel at how you manage to report so much absurdity in such a factual and forensic manner. And I don’t undestand why the newspapers and TV reporters can’t match your analysis.

    How can someone drawing such a large salary stand up in front of presumable intelligent and sensible people and spout rubbish like this – was he wearing a red nose, have a bright checked suit with matching hat plus shoes that were 2′ long?

  6. This all comes with the back beat of “look at government debt it’s going to bankrupt our great nation, look there” except this is piffle, the next crash will be caused by private debt as all crashes are.

    To be honest I barely took this article in as I’m fuming, and I mean fuming, at how the Northern PowerHouse has been betrayed, my fault for taking the Tories seriously I suppose.

    • Devolved power means another layer of your vampire like bureaucracy and jobs for the boys.

      And as this article shows collectively these people could not pour pi55 out of a Wellington boot if the instructions were on the heel.

  7. Shaun, thanks for being on top of it, pointing out all the contradictions. BobJ below makes clear the worst cause and effect misnomer, High property costs have driven demand for credit which is the most peverse reading of ZIRP I’ve ever seen.

    Today I’ve been doing my best to wreck “my precious”. I am the banks and the BofEs worst nightmare – a responsible borrrower. Not only did I clear a multi-thousand pound credit card debt 3 days before the 36mth zero percent expired but I did it from earnings – not by rolling it over. That is debt destruction and bank destruction of the worst kind. Virgin money had already booked my £5k as interest earning revenue debt, now they got loss making customer but worse than that I haven’t involved another banking friend in writing yet more credit… Is this is the end of the world?

    Im waiting for the banking system to collapse.. 😉

    • unfortunately we will not see a “Banking collapse”

      it will be like “peak oil” being called peak demand , it will be called something else, possibly blamed on all those people using notes…..

      so it will also be a surprise too!


  8. As I commented before the basic economic problems can only be resolved with fiscal policies that reduce the savings level to that which can be employed by the economy. And yes, I mean the real economy excluding such features as Zombie corporations, etc. The BoE is powerless to take these steps; even if they were aware of the nature of the problem. It would be encouraging if one thought that, even though powerless, they did understand the nature of the problem.
    However, I write to be a touch pedantic. As a rule of thumb households have always spent roughly a third of their gross income on accommodation; irrespective of whether they rented or bought. In my experience this has been true in every decade from the fifties. Academics suggest the same has been true for much longer. It suggests that prices are dictated by affordability; and that, on average, households can afford one third. What is perhaps a change is that household incomes are not only higher because of inflation and real growth in the economy; but because the proportion of workers in each household has been increasing. One of the drivers for higher housing costs perhaps?

  9. I found the remark concerning loan to income ratio interesting. I have no statistical information from Germany, but a loan to (household) income ratio of 4.5 does not seem very high to me here. Assume a better income family with 1 1/2 incomes totalling to 50kEUR (net after all taxes) per year (median disposable household income in Germany was around 24kEUR in 2010, so this is already a family that is better of). A 4.5 times income loan ratio corresponds to 225 kEUR for this family. Nowadays, for a price below 400kEUR you won’t find a house except in areas that are very far from jobs. In other areas if you are lucky, you’ll find a a mid-terrace house for that price. When you add taxes and real estate agent (together often roughly 9-13% of the price) then 4.5 incomes correspond to half the house price at best. So either a lot of persons can pay 50% down – or many house buyers will end up with loan to income ratios of rather 6-8.

  10. Pingback: The London Vampire: Afterthoughts – bill40: PROgressive MOmentum

  11. “We now get something which is breath taking if we remind ourselves again that the Bank of England has driven this with its circa £70 billion Term Funding Scheme.

    On credit cards and personal loans, terms and conditions have become easier. The average advertised length of 0% credit card balance transfers has doubled to close to 30 months………..Advertised interest rates on £10,000 personal loans have fallen from 8% to around 3.8% today, even though official interest rates have hardly changed (Chart 10).”

    Why breathtaking?

    “So 4 is the new 4.5 which is troubling in itself if you think about it in only 3 years. A”

    Disingenuous, the BOE is merely commenting that the percentage of mortgages in excess of 4 times salary is growing they have made no effort to relate that comment to the macroprudential policy of a ceiling of 4.5 times income restricted to 15% of new loans made, you have made that unconnected connection.

    A house at 4.5 times income attracting less than 4% mortgage interest is the same as a house at 2.25 times income attracting 8% mortgage interest except in the late 80’s when no one complained of expensive housing, houses cost 3x income at 8%, so too expensive? Pull the other one!!

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