Shares in some of the UK's best known banks have fallen after the Bank of England warned the sector could be in trouble from potential losses on consumer credit.
A report on the Bank of England’s Financial Policy Committee meeting from 20 September states the UK’s growing consumer debt pile threatens to damage the capital positions of Britain’s biggest banks should a recession take place.
The Bank of England wants UK banks to put aside £10bn more capital to protect themselves in the event of a consumer credit crisis.
Shares in Barclays (BARC) fall 1.1% to 189.4p, HSBC (HSBA) is down by 0.8% to 721.4p, while Lloyds (LLOY) drops 0.8% to 66.41p.
The Bank of England describes the consumer credit market as a ‘pocket of risk’. It says banks are underestimating the losses they could incur if the economy turns.
It warns that if the UK enters a recession, ‘the UK banking system would, in aggregate, incur losses of around £30bn, or 20% of consumer credit loans’.
More stress
New capital requirements will be set for individual lenders after the Bank of England publishes the next stress test results on 28 November.
This will try to ensure ‘that each bank can absorb its losses on consumer lending, alongside all the other effects of the stress scenario on its balance sheet’.
The tests will be carried out by the Prudential Regulatory Authority, which will review banks' credit quality standards when granting loans.
The Bank of England itself says rising consumer debt defaults would be unlikely to materially damage economic growth. Instead warns that rising defaults would not be without cost.
