Banks see increase in defaults

Data from the Bank of England shows that banks and building societies have seen an increase in defaults. In the three months to February, lenders said that default rates on secured loans to households, such as mortgages, and unsecured loans, such as credit cards, increased and are expected to increase further in the next three months.

The Bank’s credit conditions survey found that credit availability for secured lending remained steady in the period. However, lenders expect it to dip in the next three months.

The data also found that lenders were already reducing interest-free loan periods. The report also said that the repercussions of the banking crisis are unclear but central banks forecast a further tightening in lending.

Commenting on the data, Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown said “Watchful eyes are on any sign of credit conditions tightening as a result of the banking crisis which erupted in March, and the environment in the run-up to the turbulence showed that lenders were already becoming more risk averse.”

“The interest-free loan periods available for credit cards decreased in the first quarter of the year and are expected to narrow further. It’s little surprise that lenders were tightening up, given that default rates for unsecured lending had already increased during the first few months of the year and were expected to lift again towards the summer. Lenders were already expecting that there will be less secured credit available for home loans during the Spring months. A squeeze in lending to big firms wasn’t expected in the second quarter, although this may be because demand for credit from larger corporates had decreased at the start of the year.”

“Due to the lag effect of the banking crisis, it’s too early to establish just how much the picture will have changed, but central banks are bracing for a further tightening of credit conditions. This was clear from the latest Fed minutes and from the most recent comments from the governor of the Bank of England. The repercussions from the collapse of Silicon Valley Bank are expected to tip the US economy into a mild recession, and the Bank of England is also concerned that the rapid nature of recent bank runs may mean lenders will have to increase their capital buffers even further to protect themselves, in addition to the cushions they have built up since the financial crisis. Banks have benefited from high interest rates which have boosted their net income margins, but as stormier weather approaches and the need to attract in more deposits rises, those net income margins face a squeeze.”