"Lenders have not entered, but they may be dicing with the spiral of complacency."
In a speech at the University of Liverpool, Alex Brazier, Executive Director of Financial Stability and a member of the Financial Policy Committee, said that lenders think they can "reduce prices and loosen lending criteria" in a period of good economic performance and low loan losses.
Brazier highlighted that lending standards "can go from responsible to reckless very quickly", adding: "the sorry fact is that as lenders think the risks they face are falling, the risks they - and the wider economy - face are actually growing".
Brazier believes that fierce competition for business is showing up in increased lending at higher loan-to-income multiples, with the share of lending at an LTI above 4 increasing to 26% from 19% over the past two years.
“Lenders have not entered, but they may be dicing with the spiral of complacency,” he warned.
Brazier continued: "High levels of mortgage debt can make downturns deeper by causing consumers to aggressively cut back spending in order to service their mortgages. High levels of consumer debt – like credit card debt and personal loans – can make banks more vulnerable to downturns because borrowers are much more likely to default. More vulnerable banks cut back lending, also making downturns deeper. Countries with higher levels of debt can therefore have more vulnerable banks and deeper recessions."
Brazier highlighted the "defence lines" the Bank has introduced to guard against the "spiral of complacency" by lenders, including pro-active supervision of banks and building societies, regular stress testing, and measures to restrict high loan-to-income mortgage lending.
However these defence lines “do not eliminate the risks that borrowers and lenders take on when entering into a loan” he warned, but instead “safeguard everyone else - the wider economy - from collateral damage".
