The Bank of England has given British banks two months to examine their lending strategy, increasing scrutiny after it was found that consumer lending is growing at a faster rate than expected.
Banks will now have to explain their methods to the Bank of England, before the information is passed onto the Prudential Regulation Authority who will take further steps to regulate the sector if needed.
The Bank of England commented on the alarming increase in consumer debt last week, saying that borrowers are becoming “dependent on long-term 0% promotional offers (including balance transfers) to attract new balances.”
After a review of the consumer credit sector, the Bank found that lending is growing at 10.3 percent a year – outpacing the 2.3 percent rise in household income.
On Tuesday, the Bank said: “Where new business on 0% interest credit cards is only marginally profitable, it implies that firms will be facing losses if model assumptions turn out to be optimistic.”
British lenders have until September to prove that their lending strategy is safe, after which further action may be taken.
The cost of borrowing for consumers dropped significantly over the past couple of years, with interest rates at just 0.25 percent encouraging an increase in lending. Rates on personal loans have fallen to 7 percent from 11 percent in 2012, with the average term on zero-balance transfers for credit cards more than doubling to nearly 30 months.