Easy credit offered by UK banks is endangering everyone else in the economy

UK banks are dicing with the spiral of complacency again

Bank of England official believes household debt is good in moderation

Household debt now equals 135% of household income

Now costs half of average income to raise a child

Real incomes not keeping up with real inflation

41% of those in debt are in full-time work

1.537 trillion owed by the end of May 2017

Editor: Mark O’Byrne

Why UK household debt will cause the next crisis

Household debt is good in moderation,Alex Brazier, executive director of financial stability at the Bank of England (BoE), told financial risk specialists earlier this week. But, it can be dangerous in excess.

The problem with ‘in moderation’ is that no-one knows what a moderate measure of something is until they have had too much of it. Sub prime borrowers in the U.S. and property buyers in Ireland and the UK did not know they would contribute to a global debt crisis. Central bankers in Germany in the early 1920s and more recently in Zimbabwe never thought they were doing something that would be as detrimental as it ultimately was.

The same may go for levels of debt in western countries today and indeed the QE schemes and modern monetary experiments of western central banks. And, a moderate measure of something can be too much or too little from one person (or economy) to the next.

For example, four glasses of wine for me are too much, for my Glaswegian cousin it is merely an aperitif.

We only discover what is too much when ‘oh just one more’ happens time and time again. Another example, two credit cards are too much for me to manage, for my mother (a demon in money-management) it is fine.

What about when it is two credit cards and a car loan and a mortgage? Is that too much debt for one household? Who knows, it depends on the household.

Brazier believes that we are now on the brink of household debt being in excess and therefore dangerous.

Why? Because we are seeing a 10% yoy increase in car loans, credit card balances and personal loans. This is due to a spiral of complacency from lenders who are offering cheap, easily available credit to households which have only seen their incomes rise by 1.5% over the same time period.

This is something we have talked about previously. Brazier’s comments made headlines and rightly so.

Personal debt in the UK is almost certainly already in excess and may well be the catalyst to the next financial crisis. As Brazier himself acknowledged, household debt can be dangerous‘to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.’

Yet again, something that was supposed to be in moderation has tipped the scales of balance towards obesity thanks to a nation that has gorged itself on cheap credit, all fed to them by the feeder banks and lenders.

The Spiral of Complacency

There are three main areas of concern for the Bank of England:

  1. Relaxed terms and conditions on some credit cards and personal loans
  2. Increased growth of share of high loan-to-income mortgages
  3. Rapid growth of credit used to buy cars means lenders may be exposed to prices in the used car market

Understandably household debt can have a significant impact on the economy. Those with high loan-to-income mortgages will cut spending should interest rats rise or incomes fail to. Personal loans and high levels of consumer credit make banks vulnerable during downturn, should borrowers default.

What has lead to this ‘spiral of complacency’ from lenders and banks?

Brazier expressed concern that the recent period of growth combined with low interest rates may have caused banks to relax their lending rules:

The spiral continues, and borrowers rack up more and more debt. Lending standards can go from responsible to reckless very quickly.

Low interest rates are certainly one of the key issues. Debt charities believe one of the leading drivers of rising personal debt levels is that lenders have been forced to fight for business during a time record-low interest rates, so competition has become increasingly fierce.

Many lenders now offer ‘zero-rate’ periods where no interest is due on balance transfers. We have all seen deals for credit cards that offer up to 43 months of interest-free balance transfers, or up to 31 months of interest-free sp