Banks tighten unsecured lending criteria

Written by Oliver Wade
16/07/2018

The UK’s banks recently tightened up lending standards on unsecured loans in the second quarter of 2018, following concerns in relation to potential “pockets of risk” in the British financial system, a Bank of England (BoE) survey suggested.

The number of borrowers approved for an unsecured loan in the April-to-June period dropped, with credit scoring criteria “significantly harder”, according to the survey.

An index that tracks banks’ responses revealed that credit scoring criteria for unsecured loans, excluding credit cards, rose the most since the first quarter of 2009, when the financial crisis was in full flare. The BoE has previously warned that the “pockets of risk” may be building in an otherwise stable environment. In September last year, it forced banks to add £10bn to their capital buffers to protect against defaults, warning they might be exposed to £30bn of losses in a downturn.

Over the past few years, consumer credit has built up rapidly, with an annual growth rate of 8.5 per cent in the year to May, many times fast than the economy’s expansion.

The new bank credit data showed a “significant increase” in credit card defaults, which increased at the quickest rate seen in a year in the second quarter of 2018. Expectations of a further rise in defaults also increased, a warning sign of potential future difficulties.

EY Item Club chief economic adviser Howard Archer said: “The BoE will be pleased to see that lenders expect lending standards to tighten again in the second quarter of 2018, especially for unsecured loan applications.”

Meanwhile, separate data from UK Finance revealed that strong remortgaging activity drove lending for home purchases in May, as homeowners hurry to lock in low interest rates ahead of potential base rate rises.

In May approximately 36,000 remortgage applications were completed, UK Finance members said, representing a 7.1 per cent year-on-year increase. That compared to 31,000 mortgages for home-movers, and 8.1 per cent year-on-year rise in first-time buyer mortgages at 32,200.

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