Cheap personal loans pose a threat to the financial system, the boss of Virgin Money has warned alongside the 10-year anniversary of Northern Rock’s collapse.
Jayne-Anne Gadhia, who oversaw Virgin Money’s takeover of Northern Rock’s “good” assets in 2010 after the bank’s government bailout, said the price of personal unsecured loans were too low to support the economy.
“I would say that probably there is an issue there that the price of unsecured loans is not pricing in the real risk of how they might perform in a good economy, let alone in one that might have an uncertain outlook,” she told the Press Association.
Her remarks came as the banking sector marked 10 years since Northern Rock’s crash during the height of the financial crisis.
She called on regulators to keep an eye on the car finance market, which has driven growth in consumer credit.
Bank of England worried about consumer credit
The Bank of England has expressed concerns about the rapid growth in consumer credit including personal loans, credit cards and car finance.
“The chief executive of Lloyds (Antonio Horta-Osorio) was quoted at the half-year results saying the Bank of England is concerned about credit growth, but we don’t see that on banks’ balance sheets,” Gadhia said.
“That is because there is so much growth on car manufacturers’ balance sheets and I think that is quite a difficult conundrum for the regulators.
Lloyds and Barclays most exposed to consumer credit
“Lloyds provides a dividend yield of 8%, while Barclays is one of the cheapest banks in Europe, despite fixing capital and closing non-core (operations),” they said, adding two banks are their top picks among UK lenders.
SocGen noted that Lloyds has grown car finance and bought the MBNA credit card business but other organic balances have shrunk.
On Barclays, it said the lender has grown the most in consumer credit out of the UK’s big banks since 2009 during the financial crisis with balances up 28%.
As a percentage of tangible equity, Lloyds’ consumer finance is 103%, including motor, and Barclays’ is 60%.
“A worry is that the current very strong credit quality lulls banks into a false sense of security,” SocGen said.
Concerns overdone, says SocGen
Unemployment is the main risk to consumer credit losses, meaning the risks of a Brexit slowdown may not be as painful for banks as some suspect, according to SocGen.
The UK unemployment rate unexpectedly fell to 4.3% in the three months to July from 4.4% the previous quarter, the Office for National Statistics revealed today.
“We examine many other influences (debt levels, renters vs homeowners, regulation, etc.) but don’t find that any of these have changed enough to blow the 30-year relationship between credit quality and unemployment growth significantly off course,” SocGen said.
British banking an accident waiting to happen, says think tank
Meanwhile, a report from think tank the Adam Smith Institute has said that British banking is an “accident waiting to happen” and that the Bank of England’s stress tests are “seriously flawed”.
Durham University finance and economics professor Kevin Dowd, the author of the paper, said: “The stress tests are about as useful as a cancer test that cannot detect cancer.”
“They seek to demonstrate a financial resilience on the part of UK banks that simply isn’t there.”
Dowd said the biggest risk facing the UK banking sector is the BoE’s own complacency. He believes that banks are still too highly leveraged.
“It is disturbing that 10 years on from Northern Rock, the best measures of leverage – those based on market values – indicate that UK banks are even more leveraged than they were then.”
The report urged the Bank to scrap its stress test programme and focus on raising capital standards, tightening corporate governance and reforming accounting standards.
Virgin Money’s Gadhia hit back at the claims of the report.
“My experience, and the objective data, say to me that the interventions that have been made since Northern Rock crashed mean that a crash of that type, in my view, could not happen again,” she told City AM.