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Credit Conditions Survey

12 October 2017 by Mark Holman

This morning the Bank of England released its quarterly Credit Conditions Survey. This survey covers secured and unsecured lending to households, non financial corporates, SME’s and non bank financial firms. The UK’s 7 leading lenders are asked to describe lending conditions for the previous 3 months, as well as the following 3 months.

This survey is a key ingredient on our dashboard in determining where we are in the economic cycle. Essentially what we are looking for is to see whether financial conditions have tightened or loosened by scoring the following:-

  1. Has the price of borrowing gone up or down?
  2. Has the availability of credit widened to include less credit worthy borrowers or contracted to better quality?
  3. Has the volume of lending increased or decreased?
  4. How is the demand side of the equation holding up?
  5. What has been the loss experience in each cohort?

Today’s survey results show a mixed picture from the big lenders, and it also shows that they are heeding the signals being given off by the central bank.

Secured lending to households is overall in good shape. Corporates and SME’s are having to pay slightly more for their borrowings, which is consistent with the Brexit premium that we see in the capital markets, the demand side here is also slightly muted, which once again we can probably pin on Brexit uncertainty.

The worrying part is unsecured lending to the consumer. The lenders are certainly reeling in their lending volumes and are upping the quality of those that they lend to. Part of the reason may well be the warnings from the central bank but the real reason can be seen from the default rate, and in particular non credit card unsecured lending where the default rate increased significantly. The price of this unsecured lending from the big 7 did not change, but the big drop in volumes, while demand is still intact, will force the consumer into the hands of the more specialist and more expensive lenders. So lending has essentially tightened on all fronts to this cohort.

Given the importance of the consumer to the UK economy, we have to acknowledge the risk this poses to the growth outlook going forward and we have adjusted our dashboard of inputs to the stage of the cycle accordingly.

To be clear, there are no alarm bells ringing at this stage but the tightening does pose further risks, especially with some additional tightening expected to come from the Bank of England at the next meeting.

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