The Bank of England has a credit problem

This morning has opened with news that the winter chill affecting the UK has blown down Threadneedle Street and into the office of Governor Mark Carney at the Bank of England.

House prices fell by 0.3% over the month, after
taking account of seasonal factors…..“Month-to-month changes can be volatile, but the slowdown is consistent with signs of softening in the household sector in recent months.”

That was from the Nationwide Building Society – as ever care is needed as it is only Nationwide customers – and it backed it up by saying that the outlook was also not so good.

Similarly, mortgage approvals declined to their weakest
level for three years in December, at just 61,000. Activity
around the year-end can often be volatile, but the weak
reading comes off the back of subdued activity in October
and November (approvals were around 65,000 per month
compared to an average of 67,000 over the previous 12
months). Surveyors report that new buyer enquiries have
remained soft in recent months

So at this point Governor Carney will be miserably observing weaker business for the “precious” and a monthly house price fall. If he is cold prospects may not be so good. From the Guardian.

National Grid has issued a warning that the UK will not have enough gas to meet demand on Thursday, as temperatures plummeted and imports were hit by outages.

Good to see that there has been plenty of forward planning on this front.

The crunch is also the UK’s first major energy security test since the country’s biggest gas storage facility was closed by Centrica last year. The Rough site in the North Sea had accounted for 70% of the UK’s gas storage.

Forward guidance anyone?

Three cheers from Governor Carney

However there was something of a warm fire in the Governor’s office today as he observed this from his own data.

Mortgage approvals increased in January for both house purchase and remortgaging, to 67,478 and
49,242 respectively.

The plan that started back in the summer of 2012 with the Funding for Lending Scheme continues.

Annual growth in secured lending was unchanged at 3.3% in January , with net lending at £3.4 billion.

In essence the plan was a type of credit easing where feeding cheap cash to the banks was designed to boost the UK economy via turning net mortgage lending from negative to positive. It took around a year to work but as mortgage rates fell ( initially by around 1% and later by more) net mortgage lending turned positive and has remained so. The Governor’s office will feel ever warmer as he observes this from the Nationwide.

net property wealth is the second largest store of household wealth after private pension wealth and amounted to c.£4.6 trillion over the July 2014 to June 2016 period – equivalent to around two and a half times UK output in 2016.

Any Bank of England economist looking for career advancement only has to write about these wealth effects feeding into the economy. Should he or she want solitude then all they have to do is point out the madness in using marginal prices especially at lower volumes to value a stock of housing. Then before you can cry “Oh Canada” they will be dispatched to a dark damp dungeon where the Bank of England cake trolley never arrives.


After the speech from Chair Powell on Tuesday this has become something of a theme and there is a clear example of it in the UK unsecured credit data.

The annual growth rate for consumer credit has slowed over the past year to 9.3%, driven by other
loans and advances.

This is where we get a lesson in number crunching from the Bank of England as this is represented as slowing whereas say wage growth is always on its way to a surge. In reality consumer credit has been on something of a tear and the monthly growth of around £1.4 billion has been fairly consistent whereas wage growth has so far gone nowhere. Or to put it another way the economy is growing at around 2% so there has been a 7/8% excess for quite some time now. One area which was driving this seems now to be a fading force.

The UK new car market declined in the first month of the year, according to figures released today by the Society of Motor Manufacturers and Traders (SMMT). 163,615 cars were driven off forecourts in January, a -6.3% fall compared with the same month in 2017.

This fading has been reflected in the UK Finance and Leasing Association figures.

 New business in December 2017 fell 2% by value and 5% by volume compared with the same month in 2016.

Yet unsecured lending has continued on its not so merry path and has now risen to £207.5 billion.

Business Lending

This was the main aim of the Bank of England especially for the smaller business sector, at least that is what we were told. Indeed  the scheme was modified we were told to improve that success. How is that going?

Lending to non-financial businesses fell by £1.6 billion in January . Loans to small-and-medium
sized enterprises fell by £0.7 billion, the largest decline since December 2014.

If we look for some perspective we see that three of the last four months have seen credit contractions and the six month average is -£100 million. So the Bank of England arrow if I may put this in Abenomics terms missed the smaller businesses target completely but scored a bullseye in consumer credit which is still growing at 9.3% per annum. The latter is of course in spite of us being told that conditions were much tighter in the latter part of 2017.


Those who have followed the UK economy over the years and indeed decades will know that today’s data follows a familiar theme. An easing of monetary policy such as the credit easing of the FLS and now the Term Funding Scheme ( £115.4 billion) followed by the Bank Rate cut and Sledgehammer QE of August 2016 would be expected to have the following results. A rise in mortgage lending and then later a rise in unsecured lending it has been ever thus. This is because it is easy to do for the banks and it is an area in which they excel whereas business lending is both more complex and harder to do. Track records do matter as I recall my late father telling me (he had a plastering business) that when he really needed finance the banks took it away whereas at other times it was plentiful. Please remember that when we are told small businesses “do not want to borrow” it may be because they have much longer memories than the banks.

Oh and in case the Bank of England tries to tell us unsecured credit growth can be cut by a Bank Rate rise or two please remember that credit card debt costs around 18% per annum according to its data.

If we switch to the real economy then there is another area where the Bank of England is lost in a land of confusion. This is the impact of the post EU leave vote fall in the UK Pound £ which according to the PMI business survey this morning seems to have helped UK manufacturers.

the continued rise in export orders s and an uplift in new orders from the domestic market provided evidence that the
foundations for continued growth were still buoyant………New orders
showed the largest monthly gain since November
and are outpacing the rate of growth in output to
one of the greatest extents in more than a decade.

It is possible that we are seeing import substitution as well as export growth. It makes you wonder how well they would be doing if the banks supported them with more and better finance doesn’t it?

Me on Core Finance TV













Can Britain solve its credit problems and debt addiction?

A long-standing feature of the UK economy has been a problem with credit. This has several features. A major one is our obsession with the housing market and the establishment view that the economy can best be boosted by pumping it up and claiming the higher house prices as higher wealth and evidence of economic well-being.

Figure 2 shows the value of land in 2016 is estimated to be £5.0 trillion, which is 51% of the total net worth of the UK. Land increased in value by £280 billion from 2015, a 5.9% increase. This is a notably smaller increase than in 2014 and 2015, when it increased by 15% and 10% respectively. Since the land underlying dwellings is a major contributor to the value of land, the House Price Index reflects this with house prices rising at a lower rate compared with 2014 and 2015.

So £5 trillion out of this.

The total net worth of the UK at the end of 2016 is estimated at £9.8 trillion, an increase of £803 billion from 2015 and the largest annual rise on record.

I hope you are all feeling much better off! If you are a home owner then this is rather likely to be the case.

The value of land has grown rapidly from 1995, increasing by 412% compared with an average increase of 211% in the assets overlying the land.

You may have noted the swerve here which is that we have switched from the value of houses to land which presumably sounds much more secure and safe. Also if we add the value of the houses back in then £1.77 trillion added to £5 trillion means the sector is £6.8 billion or so of UK national wealth and everything else is £3 billion. Even the most unobservant may start to wonder if that is a trifle unbalanced?!

Mortgage Debt

This is something which the Bank of England put a lot of effort into increasing back in the darker days of 2012 when there was talk of a “triple-dip” in the UK economy. As I pointed out above the traditional “remedy” is to do this to the housing market.

Pump it up when you don’t really need it.
Pump it up until you can feel it. ( Elvis Costello)

They were so keen on this that we got an official denial and the Funding for Lending Scheme was badged as something to boost small business lending something which has not gone well but more of that later. What it actually achieved was to boost net mortgage lending which then when positive and now is running at a net rate of around £3 billion per month. House prices were boosted across the UK although with widely varying impacts as London boomed but other areas struggled at least relatively. Thus we end up with a claimed asset value of £6.8 billion versus a mortgage debt of £1.37 billion. What could look safer?

The catch is that there are a litany of problems with this.

  1. The economy has been tilted towards the housing sector as we note Bank of England and government support ( Help To Buy) as well as ( capital gains) tax advantages. This has shifted resources to this sector.
  2. This would not look so good should house prices fall, what would the asset value and “wealth effects” be then?
  3. Those looking to enter the housing market or to trade up are not seeing a wealth increase but instead facing inflation. This is so worrying to the UK establishment they go to pretty much any effort to keep such inflation out of the official inflation numbers.

Accordingly we know that the Bank of England will be worried by this development at the beginning of the food chain for this area.

Mortgage approvals decreased in December (Table I), with falls for both house purchase and remortgaging approvals. House purchase approvals were the weakest since January 2015 and remortgaging approvals fell to 46,475, following strength in October and November. 

Unsecured Credit

This is something of an overflow area for UK credit. What I mean by this is that when the Bank of England gives the banks the green light to lend as evidenced by the Funding for Lending Scheme in the summer of 2012 or the Bank Rate cut and “Sledgehammer” QE of August 2016 this is the easiest area to expand. After all there is a flow of people into their branches or website wanting to borrow and saying yes is relatively simple. The tap gets turned on much more quickly than mortgage or business lending.

This how we found ourselves with unsecured credit running at an annual rate of around 10% per annum. The new feature this time around was the growth of borrowing for vehicle purchase via the growth of personal contract purchase and the like, so much so that very few people actually buy a car now.

 Over 86% of all private new car registrations in the UK were financed by FLA members.

Of course central bankers desperate to calm their fears about a possible recession were pleased at all the car buying but the ordinary person will be wondering what happens when the music stops? Actually according to the banking sector this is already taking place if you recall the survey the Bank of England published and of course the Financial Policy Committee is “vigilant”. This has led more than a few economists to tell us growth is over here. Meanwhile.

Consumer credit net lending was £1.5 billion in December, broadly in line with outturns during 2017 (Table J).  The annual growth rate ticked up to 9.5% in December. 

November was revised up from £1.4 billion to £1.5 billion as well. So we have growth of 9.5% with economic growth of around 2% and wages growth of a bit over 2%. What could go wrong?

The total for this category is now £207.1 billion.

Business Lending

Lending to smaller businesses was supposed to be the rationale for this and the official view was this.

The extension builds on the success of the FLS so far

The extension continued the rhetoric.

 to increase the incentive for banks to lend to small and medium‐sized enterprises (SMEs) both this year and next;

How is that going?

Lending to non-financial businesses fell by £1.0 billion in December (Table M).  Loans to small-and-medium sized enterprises fell by £0.4bn, the largest decline since December 2014. 


There is a fair bit to consider here. But let me look at this from the point of the Bank of England. It opened the credit taps via credit easing in the summer of 2012 and added to it with the Term Funding Scheme in August 2016. This of course added to the Bank Rate cuts and QE bond buying. This was supposed to boost small business lending but in fact in spite of the economic growth we have had in recent years there has been very little of that. Indeed even the better numbers were below the economic growth rate and if anything new lending to smaller businesses is stagnant at best.

Meanwhile net mortgage lending was pushed into the positive zone and more latterly unsecured credit has been on quite a tear. So if the Bank of England was a centre forward taking a penalty kick it has not only missed the goal if we looked at the unsecured credit data it may even have cleared row Z and the stands. Or of course its true intentions were always different to what it has claimed.




UK unsecured credit continues to flow unlike business lending to SMEs

Today gives us our first main insights into the UK economic trajectory so let us start off with a familiar issue. From the Nationwide Building Society.

UK annual house price growth ended 2017 at
2.6%, compared with 4.5% in 2016

So a slowing as we expected here although there were fewer cases of actual falls than I thought that there might be.

London saw a particularly marked slowdown, with prices
falling in annual terms for the first time in eight years, albeit by a modest 0.5%. London ended the year the weakest performing region for the first time since 2004.

So far house price falls are primarily a London thing as we wait to see if it will prove to be a leading indicator one more time or if you prefer the canary in the coal mine. If we return to the national picture we see that overall for the first time in a while house price growth and wage growth are similar albeit that the former still slightly edges the latter. A period of this ( or even better wage growth exceeding house price growth) would be good but somehow as ever the UK establishment seems to have other plans.

Certainly plenty of help seems to be needed as this from Henry Pryor infers.

Still struggling with this;- 3,858 first time buyers earning over £100k appear to have had Help2Buy..

Apparently according to @Andrew_J_Carter life on over £100k requires help although he has figured out what Abba would call the name of the game.

My household earns over £100k a year. We can’t afford a house (no money from parents for deposit), why shouldn’t we be entitled to Help to Buy, given the sole intent of the Government is to drive house prices up?

This brings us to regional differences as we get a new look at an issue we have discussed many times.

The picture that emerges is that this ‘typical buyer’ moves
up the income spectrum as you move from the north to the
south of the country. In Scotland and the North of England,
this buyer would lie in the 30th income percentile, while in
the South East they would be at the 80th percentile and
above the 90th percentile in London (the closest percentile
with available data).

So a cautionary note reminding us that the overall picture needs a fair bit of regional refinement especially in Northern Ireland where prices are still 40% below the previous peak. Here is some food for thought for you from the ratio of house prices to earnings for first time buyers. Back in the latter part of 2007 it rose to 8.1 in Northern Ireland and we know what happened next which should make property owners in London mull a ratio which is at 9.8!

As ever there is a general cautionary note that these figures cover only Nationwide customers and whilst it does a fair bit of business it is not the whole market and will for example miss purchases for cash.

Unsecured credit

For newer readers this has been on something of a tear in the UK over the past couple of years and in my opinion eyes cannot avoid turning to the “Sledgehammer QE” and “muscular monetary easing” of the Bank of England in August 2016 as a driver of this phase. If you look back at UK economic history monetary policy easing invariably slips into this area as frankly it is easier for the banks to do than even mortgage lending but especially business lending a subject I will return to in a moment. So where do we stand now? From the Bank of England this morning.

The annual growth rate of consumer credit slowed to 9.1% in November (Table J), the lowest rate since
December 2015. This fall partly reflects a particularly strong flow in November 2016 falling out of the annual
growth rate.

In a way it speaks for itself that 9.1% is the lowest annual rate of growth for a while. Even so it is some 7% higher than the economic growth we have been seeing and also wages growth. We have seen increases of £1.4 billion a month for the last three months which has dropped the annual rate of growth from 10% to 9.1%. So a little better but perhaps only from white-hot to red-hot so far. Also yesterday an annual rate of 6.7% growth seemed high in the Euro area and we are considerably above that.

The brochures for QE and interest-rate cuts never stated they aimed at a surge in unsecured credit did they? In fact we were assured that we were deleveraging until it was impossible to make such claims.

Business Lending

The official reason for at least some of the monetary easing in the UK was to boost lending to smaller and medium-sized businesses or SMEs. How is that going? Well net lending was zero in November which is not untypical. Also there was a clue to a possible answer to a question several of you have asked which is has lending here gone to corporate buy-to-lets? The category including rented or leased real estate rose by a net £100 million.

So as a perspective we have an area where monetary easing was definitely not supposed to go rising by £1.4 billion a month whereas the area where it was supposed to has risen by £0. It is going to require quite a few counterfactuals to cover that chasm I think!

Moving to total’s we see that unsecured credit has risen to £205.8 billion whereas lending to SMEs has stayed at £165.6 billion.

Meanwhile the Term Funding Scheme which provides cheap funding for the banks has grown to £102.8 billion which is a fair rate of growth considering it only started in August 2016. Those who follow my social media output will have noted challenges suggesting this is not a subsidy for the banks. Odd isn’t it that they have taken £102.8 billion of something for apparently no gain to them?


I am reminded of a past Bank of England Governor who is now called Baron King of Lothbury. He used to regularly give speeches about a “rebalancing” of the UK economy except it was not a rebalancing towards unsecured credit which his successor has managed to achieve. That road has been one which has involved higher house prices (check), balance of trade problems ( check) and one which led to overheating of the economy and interest-rate rises to correct it. In a world where consumer inflation is low and we have only had one interest-rate rise in the last decade the old concept of overheating no longer applies but parts of it can.

If we move to the real economy we see that in spite of the “hokey cokey” style policy of the Bank of England on interest-rates since the EU Leave vote the economy has in fact continued pretty consistently. This morning’s Markit PMI business survey was of a still the same variety.

the survey data are consistent with the economy having grown 0.4-0.5% in the fourth quarter of 2017.

There is an irony in that just maybe some of the rebalancing that Baron King could only dream of during his term of tenure as Governor of the Bank of England may be taking place.

Alongside the solid expansion seen in manufacturing.

If so we are doing better than the raft of annual forecasts released this week would suggest. But there is a potential black swan tucked away in the pack concerning the growth of unsecured credit and in particular its interrelation with the automotive industry. Ironically UK sales only have a relatively minor impact on UK production which is mostly exported but over the seasonal break there were a lot of adverts on the radio for car price cuts or excuse me scrappage schemes which may indicate trouble ahead.

No doubt the Bank of England is “vigilant” but the definition of that word is not what it was……..


The outlook for UK house prices is turning lower

Today brings together two strands of my life. At the end of this week one of my friends is off to work in the Far East like I did back in the day. This reminds me of my time in Tokyo in the 1990s where Fortune magazine was reporting this at the beginning of the decade.

The Japanese, famous for saving, are now loading their future generations with debt. Nippon Mortgage and Japan Housing Loan, two big home lenders, are offering 99- and 100-year multigeneration loans with interest rates from 8.9% to 9.9%.

Back then property prices were so steep that these came into fashion and to set the scene the Imperial Palace and gardens ( which are delightful) were rumoured to be worth more than California. Younger readers may have a wry smile at the interest-rates which these days they only see if student loans are involved I guess. But this feature of “Discovering Japan” or its past as Graham Parker and the Rumour would put it comes back into mind as I read this earlier. From the BBC.

The average mortgage term is lengthening from the traditional 25 years, according to figures from broker L&C Mortgages. Its figures show the proportion of new buyers taking out 31 to 35-year mortgages has doubled in 10 years.

We have noted this trend before which of course is a consequence of ever higher house prices which is another similarity with Japan before the bust there. Although there is an effort to deflect us from that.

Lenders have been offering longer mortgage terms, of up to 40 years, to reflect longer working lives and life expectancy.

Let us look into the detail.

The average term for a mortgage taken by a first-time buyer has risen slowly but steadily to more than 27 years, according to the L&C figures drawn from its customer data.
More detailed data shows that in 2007, there were 59% of first-time buyers who had mortgage terms of 21 to 25 years. That proportion dropped to 39% this year.
In contrast, mortgage terms of 31 to 35 years have been chosen by 22% of first-time buyers this year, compared with 11% in 2007.

Should the latest version of “Help To Buy” push house prices even higher then we may well see mortgage terms continue to lengthen. This issue will be made worse by the growing burden of expensive student debt and the struggles and travails of real wages.

If you extend a mortgage term the monthly payment will likely reduce but the capital sum which needs to be repaid rises.

The total cost of a £150,000 mortgage with an interest rate of 2.5% would be more than £23,000 higher by choosing a 35-year mortgage term rather than a 25-year term.
The gain for the borrower would be monthly repayments of £536, rather than £673.

House Prices

The Royal Institute of Chartered Surveyors or RICS has reported this morning.

Prices also held steady in September at the national level, with 6% more respondents seeing a rise in prices demonstrating a marginal increase. Looking across the regions, London remains firmly negative, while the price balance in the South East also remains negative (but to a lesser extent than London) for a fourth consecutive month.

“firmly negative” is interesting isn’t it as London is usually a leading indicator for the rest of the country? Although care is needed as the RICS uses offered prices rather than actual sales prices. Looking ahead it seems to be signalling a bit more widespread weakness in prices.

new buyer enquiries declined during September, as a net balance of -20% more respondents noted a fall in demand (as opposed to an increase). Not only does this extend a sequence of negative readings into a sixth month, it also represents the weakest figure since July 2016,

It is noticeable that there are clear regional influences as some of the weaker areas are seeing house price rises now, although of course that may just mean that it takes a while for a new trend to reach them.

That said, Northern Ireland and Scotland are now the only two areas in which contributors are confident that prices will rise meaningfully over the near term.

The Bank of England

This morning has seen a signal of a possible shift in Bank of England policy. If we look at its credit conditions survey we see that unsecured lending was supposedly being restricted.

Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4 (Chart 2). Credit scoring criteria for granting both credit card and other unsecured loans were reported to have tightened again in Q3, while the proportion of unsecured credit applications being approved fell significantly.

As demand was the same there is a squeeze coming here and this could maybe filter into the housing market as at a time of stretched valuations people sometimes borrow where they can. Care is needed here though as the figures to August showed continued strong growth in unsecured credit making me wonder if the banks are telling the Bank of England what they think it wants to hear.

Also we were told this about mortgages.

Overall spreads on secured lending to households — relative to Bank Rate or the appropriate swap rate — were reported to have narrowed significantly in Q3 and were expected to do so again in Q4.

However on the 6th of this month the BBC pointed out that we are now seeing some ch-ch-changes.

The cost of taking out a fixed-rate mortgage has started to rise, even though the Bank of England has kept base rates at a record low.

Barclays and NatWest have become the latest lenders to increase the cost of some of their fixed-rate products.

At least nine other banks or building societies have also raised their rates in the past few weeks.

Business lending

This is an important issue and worth a diversion. The official view of the Bank of England is that its Funding for Lending Scheme and Term Funding Scheme prioritise lending to smaller businesses and yet it finds itself reporting this.

Spreads on lending to businesses of all sizes widened in Q3 (Chart 5). They were expected to widen further on lending to small and large businesses in Q4.

This no doubt is a factor in this development.

Lenders reported a fall in demand for corporate lending for businesses of all sizes — and small businesses in particular (Chart 3). Demand from all businesses was expected to be unchanged in Q4.

The Bank of England will no doubt call this “counterfactual” ( whatever the level it would otherwise have been worse) whereas the 4 year record looks woeful to me if we compare it to say mortgages or even more so with unsecured lending.


There is a fair bit to consider here especially if we do see something of a squeeze on unsecured lending as 2017 closes. That would be quite a contrast to the ~10% annual growth rate we have been seeing and would be likely to wash into the housing market as well. Some will perhaps borrow extra on their mortgages if they can whilst others may now be no longer able to use unsecured lending to aid house purchases. These things often turn up in places you do not expect or if you prefer we will see disintermediation. It is hard not to wonder about the car loans situation especially as it is mostly outside the conventional banking system.

So we see an example of utter failure at the Bank of England as it expanded policy and weakened the Pound £ as the economy was doing okay but is now looking for a contraction when it is weaker. We will need to watch house prices closely as we move into 2018.

Meanwhile people often ask me about how much buy-to-let lending goes vis businesses so this from Mortgages for Business earlier made me think.

Last quarter nearly four out of every five pounds lent for buy to let purchases via Mortgages for Business was lent to a limited company. With strong limited company purchase application levels throughout Q2, and the softer affordability testing that is commonly applied to limited companies leading to higher-than -average loan amounts, it is no surprise to see them take such a large slice of buy to let purchase completions in Q3.

Now this is something of a specialist area so the percentages will be tilted that way but with”softer affordability testing” and “higher than average loan amounts” what could go wrong?




What are the problems raised by the unsecured credit boom in the UK?

A feature of the recent economic landscape of the UK has been the rise in unsecured credit which of course raises fears about past problems with it. This morning has seen a new way of looking at the issue and it has been provided by Citizens Advice which for those unaware provides advice on debt and money amongst other things.

Major new research by Citizens Advice finds that nearly 1 in 5 people struggling with debts has had their credit card limit raised without them requesting it -a practice the charity would like to see banned……..The charity’s major new report, Stuck in Debt, reveals that people struggling with long term credit card debt were more likely to have their limit raised. 18% of struggling credit card users had their limit raised in the past year without requesting it, compared to 12% of all credit card holders.

This reads like a chapter of Freakonomics where the bank assumes some of the functions of a drug dealer luring some of its customers in for ever more of their addiction doesn’t it? Citizens Advice does have quite a bit of up to date experience in this area.

Citizens Advice helped nearly 66,000 people with over 140,000 credit card debt problems in the last year.

Also some of the individual instances are shocking although hopefully these are the tip of an iceberg.

One pensioner Citizens Advice helped was repeatedly called by firms offering more credit cards – despite the fact that she could only afford to make minimum repayments on her existing cards. She used the cards to meet her essential bills and ended up with a total of 21 credit cards and debts totaling £70,000…..Another man the charity helped owed £15,000 on four different credit cards, but despite only making minimum repayments on each card which just covered the interest, he was notified by all four providers that they were increasing his credit limit. He turned to Citizens Advice for help when his debts hit £30,000.

Some care is needed here as people have to take at least some responsibility for their actions and the first instance begs the question of why a pensioner needed to borrow to pay essential bills. However there need to be some rules for the lenders as other wise the lenders could lend and lend and lend.

The research also showed that credit card debt led to more problems than personal loans.

People with credit card debts were also more likely to get into long term debt than those with personal loans and were less able to pay their debt down. Only 60% of people struggling with credit card debt were able to reduce it over two years, compared to 72% of people struggling with a personal loan – with credit card borrowers paying off £449 over two years, compared to a drop of £620 for people with personal loans.

This seems to be because the rules for credit card lending are more lax than for personal loans. It is therefore likely that those in the worst circumstances are pushed towards credit card borrowing which is likely to be more expensive as part of a downwards cycle.

The official response

The Financial Conduct Authority will argue it is on the case.

The FCA has announced a range of proposals to help those already in long term credit card debt – who are spending more on credit card interest charges than paying off the total amount they owe.  It says lenders should contact customers who have been in this situation for 3 years to arrange a plan to pay their outstanding balance more quickly.

Do you notice like in the case of Provident Financial that the FCA only ever seems to appear when there is a problem and never seems to be ahead of events?

The Bank of England

It has had a role in pushing unsecured credit growth higher especially if we review these words from its Chief Economist Andy Haldane on the 30th of June last year.

 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

He continued in the same vein or perhaps wanted to inject in the same vein.

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.

Back then there was of course a policy move from the Bank of England including a Bank Rate cut, more QE and credit easing via the Term Funding Scheme. It is easy to forget now ( especially) if you listen to the Bank of England but the “Forward Guidance” was for even more easing last November. So if you were a bank you were effectively told that if you went out and lent the Bank of England had your back. As they had already been pushing mortgage lending and business lending is difficult ( I have discussed her many times the failure of efforts in this regard) it was always likely that the lending would spread to other areas. Indeed if you are in the sort of panic Andy was in back then any lending by banks might seem a good idea. On this road unsecured lending by banks and car finance by the manufacturers ( which some think is secured others not so) was likely to rise in what we might call an “unexpected” consequence.

Yes Prime Minister

This excellent television series would of course from time to time involve the apocryphal civil servant Sir Humphrey “solving” a problem he had created in the past. On this road the Bank of England can stoke a boom whilst claiming it is in fact being “vigilant” and then when there is trouble its PR department goes into overdrive pointing out what it is doing to fix the problem. The fact it helped create it gets redacted from the official version of history.


We are likely to see more of these sort of stories in the months ahead as the issue continues as this morning’s data release from the Bank of England reminds us.

The annual growth rate of consumer credit fell to 9.8%, the lowest since April 2016, as the July flow was a little weaker than recent month.

If we move to credit card lending the annual rate of growth dipped from 9% in June to 8.9% in July which compares to an annual rate of economic growth ( GDP) of 1.7%. Quite a gap isn’t it?! Is it Sledgehammer sized? As to the small and medium-sized business lending we have been promised since the summer of 2013 how is that going?

Loans to small and medium-sized enterprises decreased by £0.2 billion

The Bank of England seems at times rather detached from reality as this below indicates.

How important are good customer relationships to keeping distressed banks stable?

However there may be a little light at the end of the tunnel. We have seen business surveys from the Confederation of British Industry saying manufacturers are exporting well. This has not been matched by the official data until perhaps this morning.

Loans to large non-financial businesses increased by £8.2 billion in July (Table M), with a particularly large increase in the manufacturing sector

Is the J-Curve finally kicking in? Only time will tell.



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?


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.




The Bank of England has driven a surge in UK unsecured credit

Today sees the latest UK consumer credit figures and shows us that a week can be a long time in central banking. After all at Mansion House we were told by Bank of England Governor Mark Carney that its surge was in fact a triumph for his policies.

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.

Happy days indeed although of course his expectations were so low it was almost impossible not to outperform them. But of course it was not long before we saw some ch-ch-changes.

Consumer credit has increased rapidly……….Consumer credit grew by 10.3% in the twelve months to
April 2017 (Chart B) — markedly faster than nominal
household income growth. Credit card debt, personal loans
and motor finance all grew rapidly.

But this is a triumph surely for the last August easing of monetary policy and Sledgehammer QE? Apparently no longer as we note that a week is as long in central banking as it is in politics.

The FPC is increasing the UK countercyclical capital buffer
(CCyB) rate to 0.5%, from 0% (see Box 1). Absent a
material change in the outlook, and consistent with its
stated policy for a standard risk environment and of moving
gradually, the FPC expects to increase the rate to 1% at its
November meeting.

There is something of a (space) oddity here as monetary policy is supposed to be a secret – although if we go back to last July Governor Carney forgot that – whereas we see that the same institution is happy to pre announce financial policy moves. Also we need a explanation as to why financial policy was eased in a boom and now tightened in a slow down

But that was not the end of it as yesterday Governor Carney went into full “unreliable boyfriend” mode.

Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues
to lessen and the policy decision accordingly becomes more conventional.

This saw the UK Pound £ as the algo traders spotted this and created a sort of reverse “flash crash” meaning that it is at US $1.298 as I type this. Maybe they did not read the full piece as there was some can kicking involved.

These are some of the issues that the MPC will debate in the coming months.

So not August then? Also the Governor loaded the dice if you expect consumption to struggle and wage growth to be negative in real terms.

The extent to which the trade-off
moves in that direction will depend on the extent to which weaker consumption growth is offset by other
components of demand including business investment, whether wages and unit labour costs begin to firm,
and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit

Indeed as this week has been one for talk of central banks withdrawing stimulus let us return to reality a little. From @DeltaOne.


So it would appear that you might need to “live forever” Oasis style to see the Bank of Japan reverse course although they will run out of ETFs to buy much sooner.


I spotted that Governor Carney told us this as he relaxed in the Portuguese resort of Sintra.

Net lending to private companies is been growing
following six years of contraction. Corporate bond spreads are well below their long-run averages.. And credit conditions among SMEs have been steadily improving.

Regular readers of my work will be aware that I have for several years now criticised policy on the ground that it has boosted consumer credit and mortgage lending but done nothing for smaller businesses. I will let today’s figures do they talking for me especially as they follow a long series.

Loans to small and medium-sized enterprises were broadly

Also I have spotted that of the total of £164.3 billion to SMEs some £64.5 billion is to the “real estate” sector. Is that the property market again via the corporate buy to let sector we wondered about a couple of years ago?

Buy To Lets

Sometimes it feels like we are living in one of those opposite universes where everything is reversed like in Star Trek when Spock becomes emotional and spiteful. This happened to the max this week when former Bank of England policymaker David “I can see for” Miles spoke at New City Agenda this week about the house price boom. Yep the same one he created, anyway as you look at the chart below please remember that the “boost to business lending” or Funding for Lending Scheme started in the summer of 2013.

Today’s data

There is little sign of a slow down in this.

Annual growth in consumer credit remained strong at 10.3% in May, although below its peak in November 2016

I have been asked on Twitter how QE has driven this as the interest-rates are so high? Let me answer by agreeing with the questioner and noting that low interest-rates are for the banks not the borrowers as we note this from today’s data.

Effective rates on Individual’s and Individual trusts new ‘other loans’ fixed 1-5 years increased by 3bps to 7.68%,
whilst on outstanding business, effective rates decreased by 4bps to 7.38%.

I had to look a lot deeper for the credit card rate but it is 17.9% so in spite of all the interest-rate cuts it is broadly unchanged over our lost decade. My argument is that we need to look at the supply of credit which has been singing along to “Pump It Up” by Elvis Costello as we note £445 billion of QE, the FLS and now the £68.7 billion of the Term Funding Scheme. My fear would be why people have been so willing to borrow at such apparently high interest-rates?

The picture is not simple as some are no doubt using balance transfers which as people have pointed out in the comments section can be at 0%. But they do run out as we reach where the can is kicked too and a section of our community will then be facing frankly what looks like usury. The only thing which makes it look good is the official overdraft rate which is 19.7% according to the Bank of England.


The Bank of England is lost in its own land of confusion at the moment and this has been highlighted by its chief comedian excuse me economist Andy Haldane this morning.

Bank of England chief economist Andy Haldane said on Thursday that the central bank needs to “look seriously” at raising interest rates to keep a lid on inflation, even though he was happy with their current level.

Did anybody ask whether would also “look seriously” at cutting them too? Meanwhile for those of you who have read my warnings about consumer credit let me give you the alternative view from the Bank of England house journal called the Financial Times. Here is its chief economics editor Chris Giles from January 2016.

Britain is gripped by unsustainable debt-fuelled consumption. So fashionable has this charge become that Mark Carney was forced this week to deny that the Bank of England was responsible. The governor is right.

Indeed he took a swipe at well people like me.

Even armed with these inconvenient facts,ill-informed commentary accuses George Osborne of seeking to ramp up household debt.

As we make another addition to my financial lexicon for these times there was this which I will leave to you to consider.

Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.