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PF Blog: Household debt on the rise again – will the FPC intervene?

Written by Martin Upton

Friday 4th December 2015

The boom in household borrowing in the late 1990s and 2000s, which saw household debt double to £1.4 trillion between 2001 and 2008, came to a swift halt when the financial crisis of 2007/08 threatened the UK banking system. 
Subsequent years saw the aggregate of personal debt remain relatively stable at £1.4 to £1.5 trillion, as both households and banks applied much more caution to borrowing and lending respectively. Unsecured personal debt actually fell by 25% between 2008 and 2013 as households either paid off these debts or converted them to cheaper secured loans.
Now fears are emerging about a renewed surge in borrowing – a surge that may force the Bank of England’s Financial Policy Committee (FPC) to take action. Consumer credit, which comprises overdrafts, loans and credit card debt rose by £1.2 billion between September and October making the annual rate of growth 8.2% - its highest for nine years. 
At the same time mortgage lending rose by £3.6 billion – the highest monthly increase since 2008. The overall increase in household debt in October amounted to £4.8 billion – matching the monthly levels of increase we were seeing at the time the financial crisis unfolded.
There are clear reasons why households are keen to borrow again – and lenders to lend. Unemployment has fallen sharply in recent years and average real incomes are rising. Interest rates remain at historic lows, helped by fierce competition between lenders for both loan and mortgage business. With price inflation at minus 0.1% and continuing concerns about global economic growth, interest rates seem unlikely to rise in the foreseeable future.
Whilst borrowing remains affordable at current interest rates, there are growing concerns about what will happen when interest rates eventually start to rise. There is also some evidence from the National Debtline that some of the growth in lending is resulting from households seeking credit to meet day-to-day expenditure rather than to fund the purchase of property or other assets. The new boom in borrowing will also feed through to house prices, particularly given the historically low number of properties currently on sale in the UK.
Given that interest rates cannot be used to apply the brakes to borrowing, the Bank of England’s Financial Policy Committee (FPC) may be forced to apply alternative constraints. The FPC’s role is to monitor the economy and financial system and to advise on measures needed to ensure the stability of both. The measures it could apply may revolve around making it more costly for banks and other lenders to make loans – particularly unsecured loans. 
This can be achieved by boosting the amount of capital lenders have to hold in reserve against their unsecured loan books. Alternatively, under the current capital regulations lenders can be required generally to hold more capital in their so-called ‘countercyclical buffer’. This buffer is currently set at zero but can be raised if the FPC recommends that a reining-in of lending is warranted. Capital is expensive for lenders and having to hold more of it would make loans more expensive to households.
Curiously whilst the boom in household borrowing is causing concerns, then so is the lack of lending to small and medium sized enterprises (SMEs). As a result the Bank of England’s Funding for Lending scheme, which provides cheap funds to banks and other lenders for lending to such businesses, has been extended for two years to January 2018. 
Certainly the juxtaposition of a boom in household borrowing and a business sector finding it difficult to access credit is, surely, an uncomfortable position for the economy to find itself in. The FPC will be alive to this – so watch this space.
*Martin Upton is Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)

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