The Bank of England has a credit card problem

This morning has brought a development in two areas which are of high interest to us. So let us crack on with this from the Financial Times.

The Bank of England has issued a warning about the sort of risky lending practices particularly important to Virgin Money, at a critical time in the bank’s negotiations over a £1.6bn takeover by rival CYBG.

When one reads about risky lending it is hard not to think about the surge in unsecured consumer lending in the UK over the past couple of years or so.

The 12-month growth rate of consumer credit was 8.8% in April, compared to 8.6% in March ( Bank of England)

That rate of growth was described a couple of months ago as “weak” by Sir Dave Ramsden. Apparently such analysis qualifies you to be a Deputy Governor these days and even gets you a Knighthood. Also if 8% is weak I wonder what he thinks of inflation at 2/3%?

However the thought that the Bank of England is worried about the consumer fades somewhat as we note that yet again the “precious” seems to be the priority.

In a letter sent to bank chiefs last week seen by the FT, the Prudential Regulation Authority, BoE’s supervisor of the largest banks and insurers, said “a small number of firms” were vulnerable to sudden losses if customers on zero per cent interest credit card offers then leave earlier or borrow less than expected.

How might losses happen?

Melanie Beaman, PRA director for UK deposit takers, wrote that banks with high reliance on so-called “effective interest rate” accounting should consider holding additional capital to mitigate the risks.

The word effective makes me nervous so what does it mean?

EIR allows lenders that offer products with temporary interest-free periods to book in advance some of the revenues they expect to receive once the introductory period ends.

That sounds rather like Enron doesn’t it? I also recall a computer leasing firm in the UK that went bust after operating a scheme where future revenues were booked as present ones and costs were like that poor battered can. Anyway there is a rather good reply to this on the FT website.

I am expecting to win the lottery. Can l  bank the anticipated income now please?  ( TRIMONTIUM)

There is more.

Optimistic assumptions about factors such as customer retention rates and future borrowing levels allow banks to report higher incomes, but increase the risk of valuation errors that could lead to a reversal and weaken their balance sheets, according to the PRA.

Are these the same balance sheets that they keep telling us are not only “resilient” but increasingly so? We seem to be entering into a phase where updating my financial lexicon for these times will be a busy task again. Perhaps “Optimistic” will go in there too?

Moving on one bank in particular seems to have been singed out.

Almost 20 per cent of Virgin Money’s annual net interest income in 2017 came from the EIR method. Industry executives said any perceived threat to capital levels could strengthen CYBG’s (Clydesdale &Yorkshire) hand in negotiations. Virgin Money declined to comment on the PRA’s letter or the merger discussions. CYBG and the PRA also declined to comment.

This is a little awkward as intervening during a takeover/merger raises the spectre of “dirty tricks” and to coin a phrase it would have been “Fa-fa-fa-fa-fa-fa-fa-fa-fa-far better” if they have been more speedy.


We do not mention this often but let me note this from a speech from Anil Kashyap, Member of the Financial Policy Committee. Do not be embarrassed if you thought “who?” as so did I.

The statute setting up the FPC also makes the committee responsible for taking steps (here I am
paraphrasing) to reduce the risks associated with unsustainable build-ups of debt for households and
businesses. This means that the FPC is obliged to monitor credit developments and if necessary be
prepared to advocate for policies that may lead some borrowers and lenders to change the terms of a deal
that they were otherwise willing to consummate.

Worthy stuff except of course if we move to the MPC and go back to the summer of 2016. This was Chief Economist Andy Haldane in both June and July as he gave essentially the same speech twice.

Put differently, I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature
rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption.

Seeing as monetary policy easings in the UK had invariably led to rises in unsecured borrowing you might think the FPC would have been on the case. However Andy was something of a zealot.

In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a
collective policy response aimed at helping protect the economy and jobs from a downturn. Given the scale
of insurance required, a package of mutually-complementary monetary policy easing measures is likely to be necessary. And this monetary response, if it is to buttress expectations and confidence, needs I think to be
delivered promptly as well as muscularly.

Not only had Andy completely misread the economic situation the credit taps were turned open. He and the Bank of England would prefer us to forget that they planned even more for November 2016 ( Bank Rate to 0.1% for example) which even they ended up dropping like it was a hot potato.

My point though is that the cause of this below was the Bank of England itself. So if the FPC wanted to stop it then it merely needed to walk to the next committee room.

Consumer credit had been growing particularly rapidly. It had reached an annual growth
rate of 10.9% in November 2016 – the fastest rate of expansion since 2005 – before easing back
somewhat in subsequent months. ( FPC Minutes March 2017)

As some like Governor Carney are on both committees they could have warned themselves about their own behaviour. Instead they act like Alan Pardew when he was manager of Newcastle United.

“I actually thought we contained him (Gareth Bale) quite well.”

He only scored twice…..

Credit Card Interest-Rates

Whilst the Bank of England is concerned about 0% credit card rates albeit for the banks not us. There is also the fact that despite all its interest-rate cuts,QE and credit easing the interest-rate charged on them has risen in the credit crunch era.

Effective rates on the stock of interest-charging credit cards decreased 22bps to 18.26% in April 2018.

I remember when I first looked back in the credit crunch day and it was ~17%.


You may be wondering after reading the sentence above whether policy has in fact been eased? I say yes on two counts. Firstly it seems to be an area where there is as far as we can tell pretty much inexhaustible demand so the quantity easing of the Bank of England has been a big factor eventually driving volumes back up. Next is a twofold factor on interest-rates which as many of you have commented over the years a lot of credit card borrowing is at 0%. It may well be a loss leader to suck borrowers in but it is the state of play. Next we can only assume that credit card interest-rates would be even higher otherwise although of course we do not know that.

What we do know is that unsecured lending of which credit card lending is a major factor has surged in th last couple of years or so. Accordingly it was a mistake to give the Bank of England control over both the accelerator and the brake.

Me on Core Finance TV


20 thoughts on “The Bank of England has a credit card problem

  1. 0% finance (with a fee) allows customers to spend, whilst also keeping money in their current accounts.
    The money lent counts as an asset, the fee pays for the loan; the money kept in accounts is part of the bank’s reserves.

  2. Re your remarks in the video about the four witnesses castigating the RPI before the House of Lords Economic Affairs Committee, it is worth reviewing the remarks of that previous castigator, Mark Carney, before the same Committee in January. Carney said (ht Jonathan Gardner) to Lord Burns when asked about switching away from indexing gilts based on the RPI: “I have seen this in the past; I saw it in Canada—in the end you have to pick a date, and it tends to be seven, eight or 10 years down the road, at which point you will have transitioned off and then work back.” If Carney was a little vague, it was because the Government of Canada Real Returns Bonds were indexed to the CPIXFET, the Bank of Canada’s original operational guide, and then they were transitioned to another core inflation measure, CPIX, which became the operational guide in May 2001. This was shortly before Carney arrived at the Bank of Canada as an ADG. So if what he said is accurate this transition from indexing by CPIXFET to CPIX went on while he was successively ADG at the BoC, senior ADM at the Department of Finance, and then BoC Governor. At no point in all this time did he complain of any “known errors” in the OOH component common to both series. It is hard to see why not, since the same accounting approach variant of the user cost approach is used to measure OOH costs in the Canadian CPI as in (since its February 1995 update) the RPI. Why is Carney so proud of how this was managed if he was just transitioning from (his evaluation, not mine) one garbage upratings measure to another?

    • Hi Andrew

      If your inflation measures in Canada were at least similar as suggested by your description of them as core measures then that is different to here where we do not have something similar to RPI. Ironically Governor Carney and the UK establishment have shot themselves in the foot by emphasising the formula effect his estimate of 0.7% keeps being quoted and 0.7% per year compounded ends up being a tidy sum

      Next comes the issue of the “ten-years” as one of the actuaries at the meeting said he thought that the RPI risk for his industry was perhaps for the next 100 years as prospective pensioners are still being created. How would they hedge that? The longest index-linked Gilt goes to 2068 so we need some more till the end of the century at least unless there is a realistic replacement.

      In my opinion the HCI/HII is the one realistic alternative but already they have begun trying to water it down on the subject of student loans and surprise,surprise housing costs.

      • Thank you, Shaun. Just where are the HCIs now, anyway? Like you, I am a big supporter of the HII, but not so much of the watered down HCIs. In December there was the initial set of estimates to June 2017, and since then nothing. It looks the same kind of bait-and-switch is being done with the HCIs as was previously done with the RPIJ. They are just there to distract the policy wonks as the Government proceeds to make the CPIH the one index to rule them all and in the darkness bind them.

    • It seems I was wrong in believing the RRBs were indexed to core inflation although some Bank of Canada publications certainly suggested this. See my comment on Shaun’s June 22 blog for more detail. It still means Carney approved of the switch from one index that had “known errors” in OOH, according to him, to another with the same known errors.

  3. Reading up on my former employers Lloyds and its acquisition of MBNA last summer, it seems to represent about 10% of the market, albeit with a reputation for aggressive marketing with 0% deals lasting up to 43 months. It takes Lloyds’s share of the market to 25% just behind Barclaycard. MBNA ‘s total consumer debt is £7bn of which just under £1bn has the potential to go bad. That in itself would wipe out most of Lloyds’ Q1 profits – in these days of easy money for them.

    Add in the potential losses from mortgages going bad in a time of falling house prices and this could get really serious as Lloyds is the UK’s largest mortgage lender. Last year, Lloyds had to refund charges unfairly levied on 600k mortgage holders, who fell into arrears between 2009 and 2016 – a period in which mortgage rates were at minimum levels.

    It is interesting that Lloyds’s underlying profits have barely moved over the past three years, whereas the statutory profit has increased significantly. While PPI has been a complicating issue, I wonder if that indicates some creative accounting showing up? In April 2018, CFO George Culmer said “There are no signs of deterioration across the economy”, a view, which could get him a job at the BoE. Nevertheless, Lloyds doubled their loan impairment provision to £258m, which seems a tad optimistic given the assessment of MBNA last year.

    • Hi David

      Danny Murphy made a dash for seer of the year in terms of speed when he told us on BBC TV earlier Cristiano Ronaldo “can’t go over the wall” with the free-kick he was about to take. Nobody told Cristiano though…..

      As to the banks they so often buy at the top which apart from being an irony is especially troubling in this instance. Furthermore as you say “resilience” would suddenly become trouble everywhere for bank balance sheets if we got a new recession. Right now I would not want to be a bank involved in trade finance….

      • Only watch Brazil and Germany (so there was an unbelievable game last time, which just one seer correctly bet on). The computer company was Foreign & Commonwealth, formerly involved in shipping, which bought all the trouble at Atlantic Computers.

      • Perhaps it’s only the top BECAUSE they buy?
        Perhaps, sometimes, there’s a deliberate, or subconscious culture change in these organisations when taken-over?

        Perhaps people fear they are going to be “rationalised” and become more competitive and less cooperative?

      • I was amused by the Trimontium comment in the FT. Trimontium is my local Roman fort and it was the main supply base for the Antonine Wall. I am a member of the Trust, masquerading as Centurion Davus stationed at a local broch.

    • Our numbers might not be exactly the same, but our experience, in the UK is similar.
      Just the usual dishonesty, or Agenda 21?

    • Been reading this blog for quite a while now but not participated before, I am impressed with Shaun’s skills.

      But with reference to your link on the US I take the view most the UK indicators are misleading and don’t reflect the true state of the UK economy.
      With every more pensioners relying on state benefits and other state/council care, its placing an even bigger burden on the working population to fund that care. Its clearly being talked about and if the UK wants to provide the same care for everyone taxes will have to rise.

      I also agree with what was said in respect of the article on retail sales in the US if the economy was performing well it would be seen in retail sales!

      The UK is no different the High Street in a steep decline. When one looks around one doesn’t get the impression the UK is growing at all, personal debt is increasing and if this gets tightened up the UK would clearly suffer a recession.

      The world is over indebted and at some stage someone will have to take a hit, whether it be worse living standards or a default!

      • I did see a comparison somewhere of how the number of actively working taxpayers was shrinking compared to the costs of looking after the older generation.

        Went from something like 100+ when the welfare state was constructed to about 6 now.

        This has been known about in Germany for some time and even communicated to the younger population as a necessary burden.

  4. As ab addendum to my post, if taxes rise there will be less money to spend which in turn will hit growth. If personnel debt is tightened this will also exacerbate the above. The UK is in a rock and a hard place, they know the UK is over indebted but don’t know what to do about it. An increase in interest rates will curb debt put will also curb growth imo.

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