The lessons of the financial crisis have not been learned
Last week, the Financial Conduct Authority (FCA) warned that household debt levels are very close to their 2008 peak and, more worryingly, that many households have borrowed so much that they may be out of their depth.
"There are a significant number of households that are in so deep that the slightest sign of rough weather could see them in over their heads," said Jonathan Davidson, one of the FCA's directors of supervision.
It seems astonishing that we are already back at this point just ten years on from the financial crisis.
The ability of households to borrow was severely curtailed in the immediate aftermath of the crash. After shutting up shop for several years, the banks then opened the floodgates again in 2012, and lending resumed thanks, in no small part, to the Bank of England’s quantitative easing (QE) programme.
But rather than lend money to small businesses as the Bank had intended them to, the banks lent money to households through car loans, credit cards, low cost mortgages and personal loans. This was all in an effort to win back customers they lost to alternative lenders in the immediate aftermath of the crisis.
Now, the Bank of England is keen for the banks to slow the pace of lending and the FCA is warning households are overextended.
Financial crisis
To some extent the banks have already responded. Lending to households has slowed as the banks have tightened up the rules on who they lend to, even if the cost of borrowing hasn’t increased.
But the Bank of England has also warned that high street banks are starting to take increasing risks in selling mortgages.
And it suggested on Friday it could force them to boost their financial buffers to protect against losses.
The number of households defaulting on their loans or failing to keep up with repayments is on the rise, according to the FCA.
"If we're seeing this pattern now, what would happen if there was an economic downturn?" Mr Davidson asked.
There is a genuine concern over the potential impact a future recession might have given the current economic uncertainty and the revelation last week that the British economy will see the slowest growth of all the G20 nations this year.
Aside from forcing the banks to hold more capital, the Bank may feel it has no choice but to hike rates too in an effort to cool household borrowing figures.
So its response may well be an interest rate rise in May, even though a downward revision of fourth quarter UK GDP had placed that in doubt.
Recession
A rate hike has other benefits. With inward investment into the UK falling and economic growth impinged by Brexit, the Bank will want some wiggle room to cut rates again if a recession does materialise.
But it’s household debt that will be at the forefront of politicians’ minds.
Should Brexit lead to another recession in Britain, it will be over-indebted families with unavoidable overheads that will suffer worst.
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