Consumer Credit Debtdebts due to consumer credit
Credit of this kind - which includes majorstream items such as credit card, auto financing, consumer lending and less majorstream items such as rent-to-own arrangements - is increasing at a fast 10% per year.
What drives this credit expansion and how concerned should policy-makers be? Since many years, regulatory authorities have been relying on aggregate information from major creditors to track which creditors and product are supporting credit expansion. They do not, for example, contain less common commodities that low-income earners often depend on. They do not indicate who is taking out loans or people's total debt to various creditors and different commodities.
Loans for many commodities could quickly spread debt repayment issues to others. Here consumer interviews can provide some clues. However, polls often have finite scope for cover, are delayed (link is external), and may experience false reporting (link is external). In order to obtain a better and more complete view of credit taking, the FCA has asked for credit information from the credit bureau (CRA) for every tenth British consumer.
Credit rating agencies store monetary information on most kinds of credit - consumer credit, mortgage and utility. In this way, for example, it is possible to question whether an item has been individually borrowed across multiple credit lines or to concentrate on specific credit providers or credit lines. Our analysis of this information has enabled us to estimate the potential risk from recent credit expansion. Loan expansion has not been fueled by sub-prime debt; mortgageless individuals have been the main drivers of credit expansion; consumer indebtedness remains longer than product-level figures suggest.
With the CRA information, we can investigate the spread of creditworthiness among groups of borrower. Value is added because credit ratings are outstanding predicators of which type of borrower is most likely to fail or at high probability of experiencing greater levels of fiscal hardship. Lower creditworthiness indicates a greater chance that a individual will not be able to pay back their debt.
The ones with very low credit ratings are often described as "subprime borrowers". Figure 1 shows the proportion of consumer credit liabilities due (excluding repayments) in people's creditworthiness. Credit rating is divided into ten pails - the bottom pail contains persons with values in the lower 10th of the credit rating (the most risky borrowers).
A large part of the increase will go to the least financially troubled borrower. This shows that a small part of all consumer credit debt is owned by sub-prime customers. Some important distinctions exist when we are comparing different credit product types. Credit card lending with 0% deals and car financing focuses on the highest scoring group.
In contrast to those who borrow on interest-bearing (not 0%) credit lines, who are more likely to have low values. Considering that automotive financing and 0% credit card sales have represented much of the consumer credit expansion since 2012, this indicates that much of the expansion will go to the least financially troubled borrower.
That history is in line with the high-priced credit market used by sub-prime borrowers-who are not growing fast - on the contrary, some are declining. Figure 2 shows how the breakdown of borrowings has evolved over the years. We find little variation in credit score here in the recent times of fast credit expansion.
That applies both to the portfolio and to the inflow of new loans. However, the observation of a similar credit spread when the overall economic climate has slightly brightened can better be seen as a worsening. However, the only products for which we are seeing an increase in the level of sub-prime loans are interest-bearing credit lines.
The story also provides some prudence regarding the comparative importance of sub-prime loans. Latest research (Link is external) on the US sub-prime credit crises has shown that the pre-crisis rate of credit expansion was less dramatically and important for the explanation of the crises than previous research (Link is external). Recent credit expansion has been driven by a strengthening of mortgages standards (Link is external).
Has this streamlining had the inadvertent side effect of discouraging debtors from withdrawing home capital and instead turning towards consumer credit? Evaluate the interactions between these two segments by dividing debt and debt capital accumulation between banks and non-mortgages. Approximately half of the consumer credit portfolio is owned by those with loans.
This group, however, represents a minor proportion of the increase in assets, with 60% of the increase in assets stemming from non-mortgaggers. Reassuringly, debtors do not seem to bypass the stricter mortgages regulations by accumulating consumer credit debt. However, a pivotal issue that will arise in the future is how much of the increase will come from tenants and how much from whole propertyowners.
As we know, tenants have a tendency to pay a higher proportion of their earnings on residential construction than mortgage debtors (link is external), so they may have less earnings on debt repayment. Therefore, a quick increase in tenants' debt could be a vulnerable situation. Unrestricted property can also borrow even if they do not need it.
The survey indicates that around 40% of consumer credit householders have saving balances in addition to these debts (Link is external). Driving them by pure proprietors, the fast credit expansion of non-mortgaggers could be less anxious. Previously, the Bank explained (Link is external) that lenders' consumer credit portfolio is handled relatively quickly, which reflects the relatively tight maturities of consumer credit product (relative to mortgages).
Theoretically, this quick turnaround means that regulatory risk on consumer credit defaults could rise (or fall) rapidly as credit defaults worsen (or improve). Although this may be the case from the lender's point of view, our analyses tell a different tale from the consumer's point of view. Although a consumer can pay his debts for a credit instrument, it is not unusual for him to stay in debt by transferring funds, taking out new credit instruments or drawing on credit facilities (e.g. credit cards).
In November 2016, as shown in Chart 4, 89% of aggregate debt outstanding was owned by persons who also had debt two years before. Whereas about half of the new debt is attributable to "new" borrower loans, these individuals can usually only draw on relatively small loan sums and therefore make up a small part of the overall debt population.
These results imply that regulatory authorities should not be too relieved when observing enhancements in certain product areas by certain creditors. If there is no significant change in the borrowing portfolio, the consumer exposure could easily shift from one part of the portfolio to another rather than decrease.
The credit expansion, which is not drove above average by sub-prime borrower, is soothing. Likewise, there is a shortage of proof that limitations on the granting of mortgages lead debtors to obtain consumer credit. Consumer indebtedness remains longer than previously assumed. Tenants with tight financials can be an important (and fragile) driving force for consumer credit as well.
FPC (link is external) and PRC (link is external) have taken action in this area.