British banks tighten taps on unsecured lending

Britain's banks tightened up lending standards on unsecured loans in the second quarter of the year, following concerns about potential "pockets of risk" in the UK financial system, data published today suggest.

The proportion of borrowers approved for unsecured loans "fell slightly" during the April-to-June period, with credit scoring criteria "significantly harder", according to a Bank of England survey of banks.

An index tracking banks' responses found that credit scoring criteria for unsecured loans, excluding credit cards, rose the most since the first quarter of 2009, when the financial crisis was raging.

The Bank of England has previously warned that "pockets of risk" may be building in an otherwise stable environment. Consumer credit has built up rapidly in the past few years, with annual growth breaking above 10 per cent for a large part of 2016 and 2017. Consumer credit grew by an annual rate of 8.5 per cent in the year to May, still many times faster than the economy's expansion.

Read more: Bank of England figures show consumer credit rebounding in April

The new bank credit data showed a "significant increase" in credit card defaults, which increased at the strongest pace in a year in the second quarter. Expectations of a further rise in defaults also increased, in a warning sign for potential trouble down the road.

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

"It should also take some comfort from banks reportedly tightening their lending standards for granting unsecured consumer credit."

Meanwhile, separate data from UK Finance, the banks' industry body, showed that strong remortgaging activity drove lending for home purchases in May, as homeowners rush to lock in low interest rates ahead of potential base rate rises.

Read more: Banks expect significant tightening in consumer lending in first quarter

Some 36,000 remortgages were completed in May, UK Finance's members said, 7.1 per cent more than the same month last year. That compared to 31,100 mortgages for home-movers, and a strong 8.1 per cent year-on-year increase in the number of first-time buyers, at 32,200.

Jackie Bennett, director of mortgages at UK Finance, said: "The mortgage market is seeing a pre-summer boost, driven by a rise in the number of first-time buyers and strong remortgaging activity. It is also particularly encouraging to see an increase in homemovers, after a period of relative sluggishness in this important segment of the market.

"However, affordability remains a challenge for some prospective buyers and this is reflected by a gradual increase in loan to income multiples."

Read more: Bank of England to make banks hold £10bn more to cover consumer credit

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