Bank of England policymaker Alex Brazier has warned rising levels of household debt could pose a danger to the economy, as lending conditions become too lax.
Mr Brazier, a member of the Financial Policy Committee, made a speech at the University of Liverpool on Monday (24 July).
In it, he flagged three main risks: more relaxed terms and conditions on some loans and credit cards, high loan-to-income mortgage lending, and the fast growth of auto finance which has meant some lenders are now exposed to prices in the second-hand car market.
He noted consumer debt is rising rapidly and outpacing wage growth.
Loans, credit card balance transfers, and outstanding car loans are up 10 per cent in the past year, while household incomes have only risen 1.5 per cent.
“Household debt – like most things that are good in moderation – can be dangerous in excess. Dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy,” he said.
He warned banks and other lenders could be dicing with a “spiral of complacency”, thinking they can reduce prices and loosen lending criteria. As credit becomes cheaper, it is taken up more widely and is serviced more easily.
“The spiral continues, and borrowers rack up more and more debt. Lending standards can go from responsible to reckless very quickly. The sorry fact is that as lenders think the risks they face are falling, the risks they - and the wider economy - face are actually growing,” he said.
The Bank of England has several lines of defence to protect the economy from complacent lending. These include supervision of the banks and building societies, stress testing to make sure they could cope in recession without cutting back lending, and affordability tests on mortgage lending to limit loan to income levels.
But Mr Brazier noted these defences “do not eliminate the risks that borrowers and lenders take on when entering into a loan” but that they “safeguard everyone else - the wider economy - from collateral damage.
"They mean there’s every prospect that we can make the economy a safer place than it has been in the past.”
Very low interest rates - with the base rate currently held at 0.25 per cent by the Bank - are helping to fuel cheap borrowing.
But stagnant wages and rising inflation are also leading household to turn to credit cards and other loans to pay for day to day spending.
Inflation in the UK has been pushed to a four-year high this year, driven by the fall in the value of the pound since the EU referendum in June last year.
