The PRA undertook a review of asset quality and underwriting practices by credit card, unsecured loan and motor finance providers, following recent rapid expansion of consumer credit. Firms with material exposures in these sectors will now be asked to respond.
Overall, the PRA said the resilience of consumer credit portfolios is reducing, due to the combination of continued growth, lower pricing, falling average risk-weights and some increased lending into higher-risk segments.
It said many firms are likely to have ‘optimisim-bias’ in their projections and that consumer credit can deteriorate rapidly.
Firms are not necessarily considering rising consumer indebtedness, including secured lending commitments, in their assessments of risk and are failing to assess how future housing cost shocks could impact ability to repay.
The PRA’s statement came as The Times reported that analysts are concerned that borrowers have limited flexibility to handle the rising cost of living that comes from falling real wages, with some spending two-thirds of their monthly income on car loans, credit card repayments and rent.
Specific concerns raised by the regulator include falling margins that are not accompanied by improvements in underlying credit quality; lack of headroom for marginal business; and varying levels of risk management across firms.
Among its recommendations, the regulator said consumer credit providers must take total debt, including secured lending, into account when underwriting and consider how their affordability credit assessments might accommodate a shock to borrowers’ mortgage payments or rents.
The Bank of England will now bring forward stress test assessments on consumer credit lending for major firms.