Last month, S&P warned that UK lenders could incur £30 billion of losses on their consumer lending portfolios consisting of credit cards, personal and auto loans if interest rates and unemployment rose sharply.Much like in the U.S., S&P warned that “loose monetary policy, cheap central bank term funding schemes and benign economic conditions” had fueled an “unsustainable” yet massive expansion of consumer credit that will inevitably end badly.Per The Guardian:
The rapid rise in UK consumer debt to £200bn from car finance, personal loans and credit cards is unsustainable at current growth rates and should raise “red flags” for the major lenders, ratings agency Standard & Poor’s has warned.
In detailed analysis of the sector, S&P warned that losses from this form of lending suffered by banks and other financial institutions could be “sharp and very sudden” in an economic downturn and may be exacerbated if the Bank of England increased interest rates.
It also warned that it could downgrade banks’ credit ratings if the high growth rate persisted or banks took on too much risk in this sector. But it did not fear any system-wide impact from consumer credit.
“Loose monetary policy, cheap central bank term funding schemes and benign economic conditions have supported consumer credit supply and demand,” S&P said.
Annual growth rates in UK consumer credit of 10% a year have outpaced household income growth, which is closer to 2%, and become a focus for the Bank which is scrutinising lenders’ approach to the sector.
“We believe the double-digit annual growth rate in UK consumer credit would be unsustainable if it continued at the same pace,” S&P said.
Now, new data surrounding the growing number of court filings related to the recovery of consumer debts highlights just how serious the personal leverage problem has become in the UK. As the FT points out this morning, there have been over 900,000 court judgements on consumer debts in just the first 9 months of 2017, up 34% compared to the same period in 2016, compared to only 827,000 at the height of the great recession in 2008.
