BoE's Brazier: Wider economy is being protected from rapid growth of consumer debt

Speaking at the University of Liverpool’s Institute for Risk and Uncertainty, Alex Brazier, Executive Director, Financial Stability, and a member of the Financial Policy Committee of the Bank of England, said that High levels of mortgage debt can make downturns deeper by causing consumers to aggressively cut back spending in order to service their mortgages.

Key quotes: 

• High levels of consumer debt – like credit card debt and personal loans – can make banks more vulnerable to downturns because borrowers are much more likely to default
• In the past two years, lending has grown in line with the economy: credit supply looks neither too cold – as it has been for much of the past decade – nor too hot – as it was in the build-up to the financial crisis
• In a period of good economic performance and low loan losses, lenders can enter a “spiral of complacency”, with lenders thinking they can reduce prices and loosen lending criteria
• Lower interest income on their loans, more interest-free balance transfers and less capital allocated to consumer debt, mean banks now have a bit less capacity to absorb losses
• The rising level of consumer debt overall means it would be reasonable to expect greater losses on it in future stress tests.