We show our American stripes when we recommend that card issuers circle the wagons, but it sounds enticing when the Bank of England warns that the industry must ensure that it is not too confident in today’s “benign economic environment.”
Apparently, we sing from the same playbook. In this regulatory statement, the Bank of England Prudential Regulation Authority cites rapid portfolio buildups after the Great Recession, as a point of concern. The note cites
• “The PRA judges that the resilience of consumer-credit portfolios is reducing due to the combination of continued growth, lower pricing, falling average risk weights (for firms using internal-ratings based models) and some increased lending into higher-risk segments,”
• While consumer credit makes up less than 10 percent of U.K. banks’ lending to individuals and non-financial companies, it’s far more volatile than mortgages, with total write-offs 10 times higher since 2007, according to the BOE.
The reality check is very important. Credit card revenue and risks follow the financial cycles, so while boom times are great, deep recessions are painful. Think back to 1990 and 1985. There is much learning.
• BOE Governor Mark Carney said last month that U.K. banks may be forgetting “the lessons of the past” by relying too heavily on their own estimates of the risks on their books, understating threats and leaving them more vulnerable to stress.
A good read. If you have access to the Mercator library, take a look at our research published in early June and you will certainly find that BoE’s alarms follow our concerns. We don’t go so far as to call the economy benign, but we do say it is time to “circle the wagons”
Cheers.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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