The Bank of England has warned the country’s banks could risk losing £30bn on their lending on credit card and personal loans in the event of a sharp economic downturn.
Under the stress test scenario of sharply rising interest rates and unemployment, its Financial Policy Committee said banks should expect to write off 20% of their loans in a crisis situation.
It said banks must hold around an extra £10bn to guard against the increased “pocket of risk” of a fast-growing consumer credit sector.
“Lenders have been underestimating risks in consumer credit,” the BoE’s executive director for financial stability, Alex Brazier, said.
“Losses in (the) stress test scenario this year will be as big as in the financial crisis.”
The FPC said it would tell banks by the end of the year how much extra capital they need to hold, based on the risks of their individual lending.
Image: The Bank says lenders are underestimating risks in consumer credit
The Bank of England has kept interest rates on hold at their post-Brexit low of 0.25% – but warned earlier this month that a rise is “likely” in the “coming months” if inflation continues to surge above its 2% target.
Unemployment has fallen to its lowest level since 1975, but wage growth remains static at 2.1%.
When the inflation figure of 2.9% is taken into account it means the squeeze on family budgets is intensifying.
Prices have risen because import costs were raised by the post-Brexit vote collapse in sterling’s value.
The experts at Threadneedle Street in London also said they were keeping an eye on the “risks of disruption” on Britain’s financial services sector arising from Brexit.