“I’m shocked – shocked! – to find that irresponsible lending is going on in here”

The Bank of England’s getting a bit worried about consumer credit.

Last week, Alex Brazier, the Bank’s director for financial stability, noted that the volume of car loans, credit card balances and other personal loans had surged by 10% in the past year.

Brazier warned that lenders risk slipping into a “spiral of complacency”, notes The Times.

Dare we say it, but they’re not the only ones being complacent…

Summer time, and the lending is easy 

In the year to June, the amount of outstanding unsecured consumer credit (ie debt that you won’t lose your house over) soared to £200.9bn. Lending was last up at this sort of level in December 2008.

The Bank of England’s a bit worried. This time last week, Brazier gave a speech in Liverpool about how everyone needed to get a grip.

He noted that lending was up 10% on the same time last year. That’s at a time when household incomes are rising by just 1.5% a year.

Of course, I’m sure Brazier understands that those two things are not unconnected. Lending may well be soaring precisely because wages aren’t rising by very much and haven’t been for a long time. But his point was more to lenders – lending a load of money to someone whose income is growing a lot more slowly than their outgoings is a recipe for disaster.

Meanwhile, yesterday, credit ratings agency Moody’s joined in with the red alerts. It downgraded the outlook for bonds backed by British consumer debt. “Household debt is high and still growing, leaving consumers vulnerable to an economic downturn, while higher inflation, weaker wage growth, and levels of indebtedness leaves those in lower-income brackets the most exposed.”

As The Guardian notes, Moody’s is particularly worried about securities backed by sub-prime mortgages, buy-to-let mortgages (many of which are interest-only and so depend to an extent on house prices going up), securities backed by car loans, and credit-card loan backed securities.

In short, Moody’s is worried that UK consumers are over-extended to the point where anyone who has loaned money to them (or bought those loans in the secondary market) is heading for disappointment.

This is all very well, of course. But something else happened at roughly this time last year, I seem to remember. The Bank slashed interest rates even further, to 0.25%. And it also decided to print a load of money to flood the economy.

Depending on whether you voted to remain in the EU or to leave, you’ll either think that was a sensible precaution or a hysterical over-reaction. But regardless of your take, I think it’s fair to suggest that this might have encouraged some of the overzealous lending that the Bank is now apparently worried about.

Yet, it’s not really made an appearance in the public conversation about this. I’m trying to imagine the discussion at the Bank.

Mark Carney: “How did this happen?”

Alex Brazier: “I have no idea. It’s almost as though some powerful body with complete control over interest rates has set them so low that people no longer see the point of saving.”

Carney: “Yes. And lenders are acting as though they have reason to believe that they won’t be held accountable in any way, shape or form for making bad lending decisions. It’s as if they can’t lose!”

Brazier: “It’s a mystery.”

Carney: “Yup. I suppose we’d better keep an eye on it. You planning to watch this week’s Monetary Policy Committee meeting?”

Brazier: “Nah. They never change anything. It’s getting a bit same-y.”

An epic tale of how money always finds a way

To be fair, the Bank is trying to pull all sorts of other levers to make lenders rein in their horns. They’re forcing banks to set aside more capital to shield themselves from a slump. They’re also issuing warnings – like the one Brazier gave – to lenders that they’re onto them. Indeed, Brazier’s speech was entitled: Debt strikes back’ or ‘The Return of the Regulator’?

And Bank governor Mark Carney has told lenders that it wants details on how they approve loans to their riskiest customers. Lenders have to let the Bank know within the next five weeks. The Bank has also brought forward the latest batch of consumer credit stress tests because it’s so concerned about the rapid climb in debt over the past year or so.

The thing is though, this is all very well – but easy money finds a way. The history of financial markets is an epic (though not very heroic) tale of crafty or short-sighted lenders, who find ways to funnel cheap money to desperate or fraudulent borrowers, bypassing all of the hurdles raised by well-meaning-but-deluded or hugely-politically-compromised regulators.

The only way to issue a genuine warning shot across the bows would be to raise interest rates at the Bank’s rate-setting meeting on Thursday. It wouldn’t be particularly radical. A simple quarter-point hike would merely reverse last year’s panic cut after all.

Yet it would at least show all these irresponsible lenders and borrowers that the most irresponsible lender of them all – the Bank of England – was embarking back on the long journey to the straight and narrow path.

Is it likely to happen? I struggle to guess at this one, to be honest. I can see that if the Bank is genuinely getting worried about lending levels, then they might consider hiking rates – just to pour a bit of cold water on the markets.

At the same time, if they’re worried about the economy slowing down, they might be reluctant to do anything that could be taken as being a bigger step than it really is.

On balance, my money is on rates staying the same this week, particularly as I can’t see Carney voting for a rise, and the governor tends to have a bit of added clout.

My money is also on this particular borrowing boom ending the same way most of them do – in a heap of bad debt, and a pile of bankruptcies. But who knows? Maybe this time tinkering at the edges with macro prudential policy will actually work.

  • Tawse

    One trick pony Carney. Enough said.

    Just like the Police Chief in ‘Casablanca’ Carney’s shock will not stop him taking his winnings… I mean, his lavious salary and benefits.


  • Shaun Farrell

    It’ll end in tears.
    You can no more expect a sensible response from the BOE than you can expect a drug dealer to reduce the amount of Heroin he sells!

    • Horiboyable .

      It will not end in tears.
      It is going to end with violence.

  • Andrew Crow

    The banks got bailed out on the supposed understanding that this was going to make funds available to lend to business to reflate the economy. Didn’t happen did it?

    The cheap money went into share prices, supposedly safe secured loans (buy to let market – sounds familiar and fine while property prices continue to rise, as you say), and massive amounts into share buy-backs to inflate corporate earnings for no work.

    Redistribution of wealth continuing as it’s done for the past forty years – from public estate private hands – and then much of it squirreled away into foreign holdings on one sort or another.

    Going broke apparently is not disastrous the banks survived so the public follows suit and borrows all it can confident that the precedent for bail-out has been established. Young people are schooled early in the irresponsibility of unpayable debt through student loans as promoted by the government (and they know what they are doing, surely).

    If I’m up to my ocksters in debt and can’t repay the bank. Well tough on the bank eh? We want our money back. Bank collapse part two from the bottom up instead of the top down.

    Nobody gives a toss do they?. Why should we?

    It’ll be reight.

    • Horiboyable .

      Hell who cares. You can now buy 100 year GILTs. Loading up unborn children that can’t vote yet is perfectly moral behavior, turning future generations into debt drones is the new normal. The baby boomers are nothing but cannibals.
      We should all take care because historically when the state gets this broke they will turn on their own citizens and the system will break down. Note in the USA now how many states have legalized marijuana because they can tax it and it provides revenue. Increasingly the Police there are using civil forefeiture (confiscation of private property) on the mere suspicion it came from crime. One report about a 16 year old was selling dope from his mothers home and the house was confiscated. Well the cops dont want their pensions to be affected.

      Here in the UK you can see the signs of the system breaking down already, A&Es closing down, roads not being repaired, street lighting being turned off, hospitals under special measures, bin being emptied once a every two weeks instead of everyweek, no NHS dentist and the list goes on.
      The hallmark of a society in the state of collapse is when they debase their money and every western nation is doing this and has done for nearly a decade. There is no way out of the pain. The west is going to default on its soveriegn debt and they will keep this charade going until the very end which means they are going to take us all the way to the crash and burn stage.
      Buckle up because this is going to be an incredible ride, then maybe war.

  • DiggerUK

    All the doomsday twitchers are seeing black swans in the middle of the night.
    We are a long way past the last crisis, and this period is not even rhyming with the last time everything went a over t.
    Calm down dears, there is a while to go before anything exciting happens…_

    • Horiboyable .

      We are still in the last crisis, they have been printing money since 2008…that’s a black swan if I ever saw one!!! We will be in recession within 6 months.

      • Bearded Warrior

        Well said. This presumption that the credit crunch is over is ridiculous. 0.25% interest rates and QE are not normal conditions. We’re all just waiting for that last straw that will break the camel’s back. My money is on a North Korean War.

      • rory

        The fallacy of the ‘black swan’ is that, because no one has seen one, it doesn’t exist. There is nothing coming that isn’t bleedin’ obvious to anyone who cares to look.