Credit crunch WARNING: Bank of England fears reckless lenders could spark financial crisis

Tuesday, July 4, 2017
By Paul Martin

LENDERS have been ordered to prove they have not taken too much risk amid a consumer credit boom which has sparked fears of another sub-prime financial crisis.

Tue, Jul 4, 2017

Bank of England officials are increasingly worried reckless lending could trigger a devastating replay of 2008.

The Prudential Regulation Authority (PRA) has now given providers two months to show their balance sheets and strategies are strong enough against risks.

Policymakers last week ordered banks to increased their cash reserves so they could cope with another economic downturn.

It comes as British households continue to rack-up debts at an alarming rate.

There are particular worries around car finance, credit cards and personal loans.

The PRA today warned that lenders seem to be relying on a healthy economy and current low levels of customer defaults.

The Bank of England offshoot is worried that lenders may have overestimated the likelihood of customers being able to repay debts.

It said in a statement: “Rising consumer indebtedness and its impact on borrowers’ ability to repay their debt in the future was not always fully considered in firms’ assessment of risk.

“For example, underwriting assessments did not always take into account a customer’s total debt, including secured, nor was this routinely monitored for existing customers.

“Further, underwriting assessments rarely assessed how future shocks, for example to housing costs, could affect borrowers’ ability to repay.”

It comes amid growing expectations that interest rates could rise this year, making debts more expensive.

At the same time, wage growth has fallen below inflation mean household disposable spending power is being eroded.

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