UK unsecured credit continues to surge

This week will see the anniversary of the Bank of England decision to open the credit and monetary taps to the UK economy. It did so in a panicky response to the EU leave vote and the consequent rather panicky business surveys. It was afraid of an immediate lurch downwards in the UK economy along the lines of the recession and 1% contraction expected by its former Deputy Governor Sir Charlie Bean. Of course that did not happen which if you look at Charlie’s past forecasting record was no surprise but the UK economy was left with a lower interest-rate, an extra £70 billion of QE ( Quantitative Easing) plus a bank subsidy called the Term Funding Scheme which currently amounts to £78.3 billion. As I pointed out at the time this was in addition to the boost provided by the lower value of the UK Pound £ which in spite of a rally to US $1.31 is still equivalent to a Bank Rate cut of 2.75%.

The problem with boosting credit in that manner is that it invariably turns up in all the wrong places. Last week I pointed out the extraordinary way that Alex Brazier of the Bank of England blamed the banks for this whilst forgetting the way the Bank of England lit the blue touch-paper with what it called at the time its “Sledgehammer” of monetary easing. What did they expect the banks to do? Now it is looking into the consequences of its own actions according to The Times.

The Bank of England is demanding detailed information from high street lenders on how they approve loans after sounding the alarm over the consumer borrowing binge.
Within five weeks, banks must provide evidence of how they assess the financial position of their riskiest customers.

The FCA and car loans

The Financial Conduct Authority ( FCA ) has apparently heard a rumour that there may be trouble in the car finance market. Here are the details from this morning’s release.

The majority of new car finance is now in the form of Personal Contract Purchase (PCPs), a form of Hire Purchase. The key feature of a PCP is that the value of the car at the end of the contract is asssessed at the start of the agreement and deferred, resulting in lower monthly repayments.

If we move onto the dangers it tells us this.

The Prudential Regulation Authority notes that a PCP agreement creates an explicit risk exposure to a vehicle’s GFV for lenders. We consider that direct consumer risk exposure may be more limited, but may be heightened where there has been an inadequate assessment of affordability and/or a lack of clarity for the consumer in their understanding of the contract.

All lending scandals involve “an inadequate assessment of affordability” and a “lack of clarity for the consumer” don’t they? This is of course one of the ways the credit crunch began. Anyway there seems to be no apparently hurry as regulation continue to move at the speed of the slow train running of the Doobie Brothers.

We will publish an update on this work in Q1 2018.

It is also concerned about high cost credit too.

The FCA also identified particular concerns in the rent-to-own, home-collected credit and catalogue credit sectors.

I am no expert in this area but did notice Louise Cooper posting a link to this.

This represents a typical cost of using a Very Account.

Representative 39.9% APR variable

So only 39.65% over the Bank of England Bank Rate. But the FCA train runs with all the speed of Southern Railway.

Today’s data

We see that overall unsecured or consumer credit continues to grow strongly.

The flow of consumer credit fell slightly to £1.5 billion in June, and the annual growth rate ticked down to 10.0%

I will leave the Bank of England to decide whether this is a triumph and therefore due to its actions as it claimed for a while or a problem and the fault of the banks as it has said more recently. Its rhetoric may be having some effect as the main banks did cut their monthly lending from £921 million to £324 million. As this is an erratic series that may be a quirk of the data so I will be watching in subsequent months. But the fundamental point is the gap between the annual growth rate of 10% and economic growth (0.5%) or indeed real wage growth which is currently negative. Also the total amount of consumer credit had a big figure change as it rose to £200.9 billion in June.

If we move to the wider money supply there are issues too as aggregate broad money and lending annual growth was 5.3% in June. Whilst that is seemingly slowing it is a long way above the 1.7% annual GDP growth of the UK economy. The rough rule of thumb is that the gap is a measure of inflation or monetary stimulus and if allowed to persist invariably ends up with the sort of consumer credit problems we are facing now.

Meanwhile the stimulus was of course supposed to be for the purpose of boosting business lending to small and medium-sized businesses. If we look at that we see little sign of any great impact.

Loans to small and medium-sized enterprises increased by £0.4 billion, a little higher than the recent average.

The annual growth rate at 1.2% is even below our rate of annual economic growth. Do businesses no longer want to borrow from banks ( and if so why?) or are banks still unwilling to lend to them?

Comment

When it votes on Wednesday on UK monetary policy ( it votes then and announces on what is called Super Thursday) the Bank of England has much to consider. Firstly the way it flooded the UK economy with more QE and monetary easing and the consequences which are becoming ever more apparent. It pushed both unsecured credit and inflation higher just when the UK economy needed neither. The previous PR campaign that this was a recession averted was weak and has now been replaced by blaming the banks which of course were following the central bank’s lead.

Meanwhile the inflation it created has in one sense come home to roost. From the Guardian and the emphasis is mine.

The Bank of England will hold last-ditch talks with the UK’s largest trade union on Monday as the central bank attempts to avert its first strike in 50 years.

The stoppage has been called over a below-inflation pay offer to the Bank’s maintenance, security and hospitality staff, and was originally due to begin on Monday.

Meanwhile this was announced last week.

to appoint Sir David Ramsden as Deputy Governor for Markets and Banking at the Bank of England.

There are two main issues here. The first is that the “Governor for Markets and Banking” role invariably goes to someone who has no experience or much apparent knowledge of them.  The next is related to the first as Sir David ( the existing knighthood is also worrying) comes from HM Treasury which means that all 4 Deputy Governors comes from there now. What was that about inclusive recruitment again? Perhaps his replacement at the organisation below could look into this.

In January 2013 he became Chair of the Treasury’s Diversity Board.

Anyway he will be a busy chap.

Dave will also be a member of the Monetary Policy Committee, the Financial Policy Committee, the Prudential Regulation Committee and the Court of the Bank of England.

 

 

 

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22 thoughts on “UK unsecured credit continues to surge

  1. Shaun, no danger of “knobbled” self-serving decisions and group think there then? It seems that the BoE is nicely packed with ready “yes men” for every alphabet soup of regulatory powers.

    Credit growth at 10% , real incomes falling….. as you challenge. Justv) where is this leading us?
    Its certainly an addiction… and the crack sellers are egging it all on.

    • Hi Paul

      We were assured by Charlotte Hogg on the subject of groupthink.

      “Hogg, who is currently the Bank’s chief operating officer, also said she did not think there was a culture of group-think at the Bank. ”

      Apparently everybody at the Bank thinks that too. Meanwhile when I looked up diversity her mum Baroness Hogg was giving evidence to Parliament. You really could not make it up…..

    • “Shaun, no danger of “knobbled” self-serving decisions and group think there then? It seems that the BoE is nicely packed with ready “yes men” for every alphabet soup of regulatory powers.”

      Hmmm and exactly what are you saying to Shaun at this juncture? Think glass houses, people, stones, in, throw, shouldn’t .

      Reference my 2 criticisms below which every other member of this groupthink team of commenters have missed or are not prepared to raise. Sound familiar? I’ll give you a clue: B…..O….E

  2. No doubt Sir David’s appointment was made after the position was extensively advertised, suitable applicants were interviewed in depth and he was chosen, after much deliberation, from a short list?

    Does he have a brother who works for Barclays Bank?

    • I used, a very long time ago, to work in investment banking in the city. The clear view held then was that people fell into two categories
      1. Other city folk, who were respected and who you met in the evenings and weekends, joined Hurlingham, and who all earned large salaries. These were excellent chaps, born to tell everyone else what to do; and
      2. The peasants out there, who were fit to be employed to make the lives of people in 1 above more agreeable. This group was apparently too stupid to get into the city.

      When I left the city, I pretty quickly transferred from one of us to one of them!

      I used to feel confident that this had changed, but the above appointment seems to come straight out of my 1980s rule book

  3. Great article as always.

    Here’s another set of unintended consequences caused by the boe. I can’t link to the article as its behind a paywall:

    ‘The Universities Superannuation Scheme — which provides pensions for academics and has more than 390,000 members — recorded retirement liabilities of £77.5bn at March 31, dwarfing its assets of £60bn. ‘

    And the solution, raising tuition fees…..

    • Makes me wonder how much of the £9K tuition fees goes into the pension pot.

      Still they worked hard for that pension, so these young people wishing to study should borrow more money to pay for it via inflated tuition fees … i’m sure you’ll all agree is how decent society works .. or at least this one!

      It really must be crap being on the lowest layer of this pyramid scheme.

      • Nail hit on head. Let me get this straight:
        1. These academics approaching retirement all had free/cheap university education;
        2. They all own nice houses now;
        3. They probably have low/no debt;
        4. Actuarially, they are living far longer than the savings they made could cope with even without QE;
        5. QE has trashed annuity rates, so the fund is in deficit despite record equity prices;
        6. The shortfall is to be covered by, let me see, those rich b*stards known as students. After all, we are educating them, so they can pay for our retirement.
        In any case, student debt is already at £100 billion, so why not add another £20 billion to see us all right? So what if they can never buy a house or their own pension?
        I am going to lie down to calm down.

  4. After the government decided that it would pursue austerity even during the recession (even though it was small scale “austerity” in effect) in a veiled attempt to shrink the state this left the BOE with the job of keeping the show on the road via monetary policy which they proceeded to do.

    What this form of monetary policy does is to bring forward tomorrows purchases to today and doubtless this has been what has happened in the last few years. But it requires ever larger doses of credit and somewhere down the line the music does have to stop and we appear to be slowing at the very least at the moment; whether there is an outright stop remains to be seen but we still have a business cycle.

    With regards to fiscal policy it seems that the government has thrown in the towel but far too late as the damage done by monetary policy becomes more apparent with every day that passes as you have said. I think we’re probably well beyond the point of no return here in that, on the one hand, there is no solution to what are seemingly structural and significant spending deficits and, on the other, monetary policy is now in the position where it is unable to come to the rescue in the case of an economic downturn, unless that is the government is willing to double down on unconventional policy and go to NIRP and helicopter money and this is somewhat riskier than anything else they have tried so far.

    As far as unsuitable appointments are concerned I think the BOE have some way to go beat some of Trump’s appointments in the US; it may be dysfunctional but at least it’s good circus.

    • so at that point HMG re-negotiate our leaving the EU and we end up in the Euro and paying more to be in that club …… because it would be worse outside

      I think I see the plan 😉

      Forbin

      • Forbin, don’t jest. Its not just possible but increasingly likley. Theres no way UK can survive a financial collapse without help. We juts paid off WW2 reparations to the US, it would be ironical if the Euro came to save us from ourselves! The manacles could be quite tight though ( like Greece had it, has it).

  5. Hello Shaun,

    depressingly I suspect the BoE tactics will be the same as the generals in WWI ( this being the anniversary of Pachendale )

    We’ll cuts rates again , won’t we chaps , and more QE ! , just the sort of thing they won’t be suspecting !

    MC ‘s cunning plan………

    Forbin

      • Hi Forbin

        Well said on commemorating the anniversary, sometimes we do not know how lucky we are. As to Blackadder I love the episode where General Melchett shows him a small cabinet with the gains from a recent attack and it turns out it is not to scale and that is the gain for thousands of deaths.

  6. Hi Shaun
    Do businesses want to borrow from the banks,yes,
    or are banks still unwilling to lend to them,yes why would
    they take any risks with their planet ponzi schemes creating
    a free gravy train!
    I just had to send this link,sheer brilliance.

    JRH

  7. “What did they expect the banks to do?”

    Banks are under no requirement to avail themselves of the extra cheap financing umless they identify new opportunities in the shape of new/existing customers who can afford to take on more debt. So, of they can’t find said market segment they are expected to do nothing. Why are you asking this silly question?

  8. “If we move to the wider money supply there are issues too as aggregate broad money and lending annual growth was 5.3% in June. Whilst that is seemingly slowing it is a long way above the 1.7% annual GDP growth of the UK economy.”

    Frankly, this is meaningless without the total credit numbers as a real calculation of your alleged gap cannot be performed until the total credit number is supplied. I have neither the time nor the inclination to fish out the numbers that matter to do the calculation.

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