Bank's fears over consumer credit lending

Don Kohn, an external member of the Financial Policy Committee (FPC) at the central bank, says that if the economy’s performance doesn’t turn out to be as positive as people expect it could lead to trouble in the consumer credit lending sector.

The FPC is responsible for identifying and dealing with risks to the UK’s financial stability. The committee is set to meet later this month to discuss what actions it could take to ensure lenders behave responsibly in the face of increased consumer credit lending competition.

Speaking to The Yorkshire Post during a visit to the region, Mr Kohn said: “Consumer credit is growing very rapidly. What I heard here in Leeds is consistent with the national picture.

“There’s increased competition in this market from new entrants and from older entrants.

“Some of the largest banks dropped back from the market to some extent right after the crisis and as they recover they’re reentering this market.

“That competition has tended to compress margins. It has tended to make credit more available. So far arrears and problem loans have not increased greatly. They still remain at a low level.

“There’s some concerns that loans may be made now that people will have trouble repaying.”

He added that the FPC would take “a good look” at what actions could be taken “to make sure that consumer lending doesn’t pose excessive risk to financial stability”.

Conversely the mortgage market “seems to be in pretty good shape”, says Mr Kohn, with safeguards put in place by the Financial Conduct Authority and the FCP having the desired effect.

A decade on from the banking crisis, the Bank of England policymaker believes that a lot of work still needs to be done to repair the sector’s reputation with the public.

However, financial systems are now much more safer than they were a decade ago, he said.

Mr Kohn said “there’s a lot of work to do” in repairing the financial sector’s reputation.

He added: “A number of important steps have been taken to make the heads of these institutions and the people in responsible positions more explicitly responsible for what goes on below them, therefore incenting them to behave in a responsible way.

“There’s been a lot of work done on compensation. Trying to correct the very adverse signals that were sent by the old compensation system which were to induce people to go for very short term profits and then leave.

“Now you have to have a longer perspective. I think institutions have tried to change their cultures.

“Do I think this process is completely successful and done? No I do not. When you lose the public’s trust, when you behave in a way that merits you losing the public’s trust, it’s going to take a long time and a long period of behaving in a responsible, trustworthy way to re-earn that trust.

“The public is right to be sceptical. They need to see behaviour consistently over time and it’s way too soon for that to have happened.”

The Adam Smith Institute branded the Bank of England’s stress tests as “worse than useless”.

Mr Kohn though says he “strongly disagrees” with that assessment. He believes the stress tests, which are designed to examine a bank’s ability to withstand a severe financial shock, are stringent. Mr Kohn said: “To me they’re extremely useful and they are an important way for the Financial Policy Committee to communicate with the banking system and with parliament, and the public to hold us accountable. They are completely transparent. The scenarios are out there – they’re transparent. The results are made public on a bank by bank basis unlike a lot of supervisory information which is confidential.”

The odds of a repeat of the banking crisis of the scale seen in 2007 is very small, says Mr Kohn.

He added: “The amount of capital banks have, that’s the amount they have against unexpected developments to cushion them when unexpected things happen, is multiples higher than it was in 2006/07.

“You never can tell what would happen but the system is just so much stronger than it was and it’s getting stronger all the time.”

‘London is not everything’

Don Kohn is a former vice chairman of the US Federal Reserve. Mr Kohn believes the US economy is “doing pretty well”. He said: “Moderate growth has continued. The labour markets continue to tighten. The Federal Reserve is gradually raising rates.”

The policymaker was in Leeds to hear from people “who are on the ground and are dealing in the financial system – both borrowers and lenders”.

He said: “It’s important for members of the Financial Policy Committee, and the other committees at Bank of England that are headquartered in London to get out and talk to people throughout the country.

“London is not everything in the UK, we certainly recognise that.”