The Bank of England recently warned UK banks about the alarming amount of consumer credit. Read on to find out more about the Bank of England Prevention measures against falling into debt from Personal Loans Now.
- Steps from the Bank of England to reduce consumer debt
- The scrutinization of the mortgage industry
- The Bank of England’s interest rates
- The effect on a rise in the interest rate on households
- Preventative new measures for lenders
- The Bank’s monitoring of Brexit fears
Bank of England Prevention Measures
In this article, Personal Loans Now, a lender that responsibly finds you the best personal loans, including debt consolidation loans, looks into the measures the Bank of England takes to avoid the country falling into another financial crisis. We look at how this affects banks and interest rates.
What the Bank of England had to say about rising consumer debt
The Bank of England has ordered the banks to keep capital aside for protection from the 10% rise in consumer spending over the last year. There is an increase of personal loans when people spend beyond their means. The capital will protect the economy from another financial crisis like the one in 2008 when the banking system collapsed under the strain of too much bad debt. Leaving capital aside will result in banks having to find more than £11.4 billion of extra funds. It will need to be set aside over the following 18 months.
Annual stress tests conducted by the Bank of England will need to be conducted two months earlier than usual regarding the bank’s ability to cope with consumer credit. The FCA and the Prudential Regulation Authority will publish new guidelines. It will include how the Bank of England expects banks to treat their customers in the consumer credit market.
Mortgage lending has been scrutinised
The banks conduct a half yearly financial markets assessment from the bank. It found the risks due to Brexit. It enlighted the need to be vigilant of the increased risks to mortgage lenders from the European Union and the high price of property valuations. Measures have been set out to reign in the riskiest kinds of mortgage lending. The bank did not find that mortgage lending was either elevated or lower than normal. It wants to cover some risky aspects that are in the market by pre-empting any future problems.
Governor of the Bank of England, Mark Carney, said that he feared that lenders were making lending conditions for mortgages easier going. Lenders are taking into account the good performances of mortgages in benign conditions. He said the extra capital that would be needed to be held by banks would involve them rearranging their existing funds as opposed to raising new capital. The bank of England did relax the regulatory requirements on banks after the Brexit vote. The Bank, however, has now reversed them.
The Bank of England Interest Rates
Mark Carney was quick to report that the Bank of England was not going to raise the interest rate of 0.25% at present, which therefore should not affect personal loan rates. He pointed out the differences between interest rates and monetary policy instruments. He described monetary policy as the last line of defence when addressing financial stability issues. Also, he explained that this policy was being used to focus on inflation targets of 2% as opposed to controlling lending.
- Consumer debt has risen by 10% over the past year
- To protect banks from bad debts, the Bank of Enlgand has ordered them to hold more capital.
- The banks need £11.4 billion over the next 18 months
- Mortgage lending is stable, but measures have been taken to prevent future issues
- The Bank of England has now reversed regulations made after the Brexit vote.
- The Bank of England are not raising the rate at present
- Monetary policy was focusing on financial stability as opposed to lending
What will a rise in the Bank’s interest rate mean for households?
Debt charities expressed their fears for the financial welfare of 8.8 million consumers who use credit or unsecured personal loans for their essential bills. The fear is only if the Bank’s measures make lenders raise their interest rates. They report that many households are already just about managing. Households are struggling to keep their heads above water. They fear that an increase in their bills could push them into a spiral of debt. A spokeswoman for the Money Advice Service has praised the Bank for its action. This is because they have seen an eight percent rise in the numbers of people using their services.
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New measures From the Bank of England
The £200 billion consumer credit market is a seventh of the size of the 1.4 trillion mortgage market. However, it has written off figures many times higher. Morgage lenders will make sure borrowers can still make repayments even with a 3% change in interest rates. They use affordability tests to ensure borrowers can make these extra payments of their standard variable rate.
Measures introduced in 2014 require lenders to minimise their high-risk lending to 15% of their overall lending. This measure is currently still in place. Experts commented that the banks would not see much of a change in the way that they conduct their business. This is because many of them already hold more capital than is required.
Brexit fears over financial stability are closely monitored by the Bank
The Bank of England also reported that they were monitoring any potential stability risks. Therefore, the banks can quickly mollify any potential problems that need addressing.
Mark Carney warned that a difficult fragmentation of the European financial markets could work out costly for Britain. But the Bank of England were assessing and preparing for it.
Bank of England Prevention Measures Summary
Consumer credit has risen rapidly over the last few years to reach record levels. The Bank’s decision to protect UK banks from the threat of bad debts will help them. It will also help the customers who will be affected by a repeat of another financial crisis. The banks’ decision not to raise their interest rates has given people breathing space. It means personal loan interest rates remain the same. However, by introducing new measures for mortgage lenders to ensure new applicants can afford possible higher repayments in the future, they will be less likely to default on their loan. By analysing the stability of the European markets through the Brexit changes, the financial damages may be limited.