Posted Jan 20, 2023, 5:11 PM
This is unheard of since the financial crisis. Faced with the deterioration in household purchasing power, British banks have restricted the conditions for access to credit, as in 2008. According to the Bank of England’s (BoE) quarterly survey, the index measuring the availability of credit contracted by more than 30% in the fourth quarter of 2022.
This turn of the screw affects both so-called “secured” loans (including real estate) and “unsecured” loans (consumer loans, credit cards). It seems to be settling in for the long term since access conditions had already deteriorated in the third quarter.
At the start of the pandemic, the conditions for accessing credit also tightened sharply, but only temporarily. This time, the trend is heavy. The survey indeed shows that the banks expect to further tighten the conditions for the next three months.
Fall in the standard of living
The solvency of British households is the focus of all attention as the country struggles with inflation of more than 10%. As wages do not follow the same dynamic, the standard of living of households risks falling by 7% between 2022 and 2024, a drop not seen in 70 years.
More than half of households are in debt, 57% more precisely according to the Financial Conduct Authority (FCA), the financial regulator. High property prices mean that the British often goes into debt over thirty years, most of the time at variable rates, which makes them vulnerable to rising interest rates.
Student loans are also commonplace: nearly a third of 25-34-year-olds are still repaying a student loan. Thus, the ratio of debt to disposable income reached 139% in the United Kingdom, against 119% in France.
Low defect rate
Despite this relatively high level of debt, the Bank of England wanted to be reassuring when the economic outlook began to darken. In July 2022, its financial policy committee considered that the rise in the cost of living did not pose “the same risk for lenders and the financial system as other shocks” such as energy or raw materials. For now, default rates on retail loans remain low, but the latest BoE survey indicates that it could rise in the next three months.