The PRA has undertaken a review of the consumer credit industry and produced a statement outlining their observations together with expectations for those firms with material exposures to consumer credit.
The announcement comes in the wake of the news that consumer credit is growing at more than 10% a year, yet the household savings rate has hit an all-time low – raising concerns that some consumers are overstretching and will struggle to make repayments if interest rates rise.
The PRA is particularly concerned about the growth in 0% teaser credit card deals and PCP car finance – both could trigger steep losses for lenders if the economy deteriorates. Economists say that increased political uncertainty – due to Brexit and the hung parliament – is starting to affect economic growth in the UK.
Who’s affected and what does it mean for those lenders?
Any lenders with material credit card, unsecured personal loan or motor finance exposures will be expected to provide evidence that these risks and concerns are being addressed.
Firms must demonstrate the resilience of their customers – with a particular focus on ‘loss leader’ segments - under scenarios where the economy has transitioned from current benign conditions. Added to this the PRA want proof that lenders are applying credit rules prudently to ensure they are not being too complacent about the potential risks to their balance sheets.
Will lenders need to run additional stress tests?
The Bank of England has announced that they will be bringing forward the Annual Cyclical Scenario (ACS) stress tests for the top seven banks in the UK. They have also stated that they will work with those smaller firms, not captured by the ACS stress test, but with relatively high consumer credit exposures, to review their resilience against the stress scenario.
The impact to the biggest banks is unlikely to be significant given they will already have sophisticated stress testing frameworks in place for the ACS. However for the smaller lenders now under the spotlight, current stress testing practices should be assessed to gauge their suitability versus the proposed – and any future – scenarios.
It’s clear that prudent lending strategy and demonstrable rigorous stress testing remains high on the regulatory agenda.
Jaywing has a wealth of experience of building stress testing models across a range of portfolios, including motor finance, credit cards and unsecured loans. Our consultants have built these models often under constraining circumstances – such as limited data volume and history and unintuitive interest rate trends – pragmatic projects that have concluded with business and audit approval.