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.
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……