The Bank of England is worried. Here’s the problem: we’re borrowing more than they think is healthy. But here’s the bigger problem: we’re paying it off too. That, in turn, is leading people lending us the money to believe they’ll always get a return. Not, on the face of it, your standard crisis. But these aren’t standard times.
Over the past year, the number of mortgages requiring only a small deposit if 10% or less has grown to its highest rate since the financial crisis 9 years ago. And the consumer credit market – car finance deals, personal loans and credit cards – has swelled to more than 10 times last year’s size.
So the Bank is whacking an £11.4 billion warning across the balance sheets of Britain’s lending companies. They’re protecting the banks but it’s a message none of us should ignore.
The Bank says lenders have got too used to ‘benign conditions’ – interest rates are low, so too is unemployment, the world’s markets are performing pretty well. It believes lenders have forgotten what happens when things get bad and have started giving out more money than they should to people who, even now, can barely afford it. It’s worried that those times could all too easily come to an end and that not only will we not be able to pay for it, but ultimately lenders will have been lulled into a state of such false security that they won’t be able to cope either.
One of their biggest concerns is that, when the times get tough, many of us will simply walk away from our debts, leaving lenders with a gaping hole in their balance sheets. Unlike mortgages, when we can’t pay for smaller loans, like the one for your mobile or your car, the Bank has found that we are 10 times more likely just to walk away.
So now they’re putting banks on notice, forcing them to build to their reserves. Over the next 18 months, they’ll be forced to set aside an extra 1% on their books. That, by their calculations is £11.4 billion. It’s also a reminder to the rest of us that just because they’ll lend it, doesn’t mean we’ll be able to pay it back.