UK Banks Cut Consumer Lending After BoE Issues Warning

The Bank of England (BoE) has cautioned banks in the UK to cut back on their consumer lending as rising credit could pose significant risks to the financial sector and also the wider economy.

The BoE wants banks to make prudent decisions on lending now rather than later when a major crisis blows up.

UK Banks have followed the BoE’s instructions and have made it a lot more difficult for consumers to receive approval for new credit cards and loans. Banks have made their criteria for obtaining house loans and credit cards a lot more stringent after receiving repeated instructions form the BoE.

Unsecured credit dropped significantly in the last three months and record the fastest drop since 2009 while the credit scoring criteria for house loans has also been raised to a level not seen since 2010. A BoE survey showed that the rise in the number of credit card applications being refused is now at an 8 year all-time high.

In a statement, Samuel Tombs, chief UK economist at Pantheon Macroeconomics said

It is now increasingly likely that the credit flows in the economy will slow over the next year, keeping growth in households' spending weak even as real incomes start to rise again

The BoE has confirmed that unsecured household credit did see a sharp drop in the third quarter and will continue to experience a major drop during the fourth quarter. While consumer lending has dropped in recent months mortgage lending has continued to grow in the UK.

BoE numbers show that secured credit has grown during the last three quarters as lenders were willing to provide credit when customers were able to put down a deposit or show housing equity that was at least 25 percent of their home value. Banks have not been very keen on lending to customers who could only afford small deposits but mortgage lenders state that this policy will be changed in the coming months.

UK Finance, an industry group stated that home movers and first time buyers had taken out more loans in August and as a result mortgage lending increased. UK Finance showed that 34,000 first time buyers took out loans worth £5.7 billion in August which was an increase of 16pc in cash terms when compared to July and an increase of 12pc when compared to August 2016. Home movers took out loans worth £8.4 billion in August which was an 18pc increase from July and a 20pc increase when compared to August 2016.

Charlie Harrison

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