The Bank of England has warned that the nation’s lenders may not fully appreciate the possible knock-on effect of a large number of consumers defaulting on their debts.
The Financial Policy Committee has signalled that Britain’s building bubble of debt could have a significant impact on both financial institutions and the wider economy if the country is hit by another downturn.
The fear seems to centre on the increasing size of loans, overdrafts and credit card debts.
It has been suggested that in a particularly severe downturn, UK banks could incur losses of up to £30billion. This is tantamount to around a fifth of consumer credit loans.
The Bank’s comments this week are the latest warning from Threadneedle Street that the market needs to be vigilant about possible risks.
A number of debt charities and consumer groups share concerns about the picture which is emerging.
Mike O’Connor, chief executive of the debt charity StepChange, said: “With levels of outstanding borrowing approaching levels not seen since the economic crisis and households are increasingly financially vulnerable, debt is an issue that needs to become a priority for policymakers now.
“The way in which financial products are designed, especially credit cards, with low minimum repayments and high credit limits, can allow people to rapidly build up substantial debt levels and become trapped in spirals of unsustainable borrowing.”
Against this backdrop, the Labour Party this week confirmed that it would take action to limit the interest charged on credit card debt. It argued that the action would tackle the nation’s growing “debt spiral”.
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