The Bank of England has issued its strongest warning yet about the UK’s ballooning consumer debt, saying Britain’s banks could incur £30bn of losses on their lending on credit cards, personal loans and for car finance if interest rates and unemployment rose sharply.

After assessing the fast growth in the consumer credit market, Threadneedle Street is requiring the banking system to hold an extra £10bn of capital as protection against any future losses after finding that lenders are underestimating their exposure to bad debts in an economic downturn.

Publishing its latest assessment of risks to the financial system, the Bank also spelled out specific concerns about the impact of Brexit on £20tn of derivatives contracts used by companies and financial firms to manage their risks.

The UK’s withdrawal from the EU also raises questions about whether banks will be able to hold consumer data in Britain and the ability of insurance companies to make payments to consumers across the bloc.

The Bank’s financial policy committee (FPC) – set up to look for risks to the financial system in the wake of the 2008 crisis – is requiring more capital to be held after being concerned of a “pocket of risk in the rapid growth of consumer credit”.

It follows a warning in July by Alex Brazier, the Bank’s executive director of financial stability, of a “spiral of complacency” about a consumer credit market that was growing at 10% a year when household income had grown only 1.5%. The Bank had already told lenders to start amassing £11.4bn of extra capital in the next 18 months to protect against the rise in consumer debt.

But it is now requiring them to hold another £10bn of capital after bringing forward stress tests of the UK’s lenders based on hypothetical scenarios of interest rates rising to 4% and unemployment reaching 9.5%. This found they would incur losses of £30bn over three years – about 20% of their consumer lending – and £10bn more than might have been expected after last year’s stress tests when Barclays and Lloyds incurred the largest losses from such lending.

Shares in banks were knocked and Jasper Lawler, head of research at financial group LCG, said profits could be hit by the Bank sounding the alarm on rising debt levels. “Any restriction on lending, particularly unsecured lending like credit cards and car loans would be a direct hit to a big profit centre for banks and insurers,” said Lawler.



Each lender will be told how much they are affected at the time of the annual stress tests in November while the smaller lenders – such as Virgin Money and Co-op Bank – which do not participate in the tests will also be assessed.

“Today’s action goes further than the red-flag waving we’ve seen from the FPC up until now,” said Ruth Gregory, UK economist at Capital Economics. But, she said it was unlikely to slow the economy or prevent interest rates being raised from their 0.25% historic low in November.

While the Bank is not concerned that consumer debt will be a risk to economic growth as it is only 11% of household debt, it is a risk to lenders’ ability to withstand losses in a downturn as these loans are less likely to be repaid when consumers lose their jobs or face higher interest rates.

But the charity StepChange said more needed to be done to help “millions of households trapped in spiralling persistent debt”. “Action is needed to stop products like credit cards and overdrafts walking people into difficulty, and lenders must do more to help people safely manage their way out of persistent debt,” said Mike O’Connor, chief executive of StepChange.

Labour has proposed a cap on credit card rates, meaning people would not have to pay back more than twice the amount of their credit card borrowings, to try to help those customers with long-standing debts.



With the £30bn of potential losses, credit cards would be most severely affected with a 25% default rate, with 15% for personal loans and 10% on car finance.

Requiring lenders to hold more capital against consumer credit could lead to them pushing up interest rates or being more selective about their lending to cover their additional costs.

Charts showing how UK consumer debt has risen, and how defaults and unemployment rise together. Photograph: Bank of England

Hannah Maundrell, editor-in-chief of financial website Money.co.uk, said the initial impact would be on lenders rather on borrowers. “It’s the highest financial power telling lenders they need to be careful and set aside an extra £10bn if they want to sail through Brexit unscathed,” she said.



The Bank’s risk assessment also considers the impact of a hard Brexit – one with no deal when the UK leaves the EU in March 2019 – on the way that derivatives contracts are handled by the City and concludes tens of thousands of deals could be affected. This is a quarter of all contracts, for instance to protect against interest rates or oil prices increasing, that are not passed through clearing houses.

For large dealers between 2,000 and 4,000 of their counterparties would need to be contacted to change the terms of contracts. The Bank warned “there are no precedents” for these types of changes to take place within the 18 months left before Brexit.

Legislation could be needed to allow existing contracts to remain as they are – a process known as “grandfathering” – and only new ones are affected by the changes that are taking place.

The Bank – which has seen each firm’s Brexit plans – said they also lack “robust contingency plans” to tackle changes to the way that they will be able to store consumer data in the UK after March 2019. “Many firms currently rely on data centres located in the United Kingdom to provide financial services across Europe,” the Bank said.