Consumer debt concerns are back on the agenda after the Bank of England (BoE) warned that UK banks have misjudged their customers’ ability to pay back £145bn of outstanding consumer loans.
Business Insider’s Jim Edwards reports that, with interest rates at 4% and unemployment at 9.5%, in the event of a severe recession, UK banks would suffer a £30bn loss thanks to defaults on loan payments, according to BoE calculations.
Default rates are currently low – 2% in 2016 compared to 5% in 2011 – and that, says the BoE, has lulled banks into a false sense of security. It has led them to believe the credit quality of their customers is improving, but, in reality, it says the fall is due to a kinder macroeconomic environment.
Low interest rates and low unemployment is making it easier for consumers with low-quality credit scores to keep rolling their debt over without defaulting on payments. One tactic the BoE believes consumers are using is taking advantage of interest-free credit card balance transfer offers to keep moving debt around without paying interest on it.
Business Insider articleRBS heeds credit card concernsAt least one high street bank has taken heed of the BoE’s warning. Ross McEwan, the Royal Bank of Scotland’s (RBS) CEO, told delegates at a Bank of America Merrill Lynch conference in London on 26 September 2017 that the state-backed bank has decided not to offer customers interest-free credit cards at the moment, even though that has led to some loss of market share.
"If the Tories refuse to act, I can announce today that the next Labour Government will amend the law”A Press Association report in the
Aberdeen Evening Express quotes McEwan as saying: “We’ve made a decision that we are not going to actively get back into credit card zero balance. We have got a benign market place of low inflation and 3.4% unemployment. If any of those change even a little bit, [then the] consumer comes under pressure.”
Instead, RBS will concentrate current efforts on personal and small business loans, where the customer is contracted to pay the money back.
Aberdeen Evening Express article
Labour to cap credit card interestThe role that credit cards play in hiking up consumer debt levels is also on the radar of the opposition Labour Party. At its annual conference in Brighton, John McDonnell, the shadow chancellor, criticised the track record of three successive Conservative governments – be they coalition, majority or minority – for creating an economic situation that was forcing consumers into debt.
He called on the FCA to impose a cap on the amount of interest payable on credit cards to help consumers caught in “persistent debt”.
Reuters’ William James reports that McDonnell told conference delegates: “It means that no one will ever pay more in interest than their original loan. If the Tories refuse to act, I can announce today that the next Labour Government will amend the law.”
James reports that, while the FCA has rejected an outright cap on interest charges, in April 2017 it did propose less radical measures to encourage companies to reduce the number of customers in persistent debt.
How to tackle the existing consumer debt level may be undecided, but with growing scrutiny of the issue, banks will come under increasing pressure to at least stop it rising.
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