Tag: Net lending

We have frequently looked at patterns in lending by financial institutions in our blogs given that many economies, like the UK, display cycles in credit. Central banks now pay considerable attention to the possibility of such cycles destabilising economies and causing financial distress to people and businesses. There is also increased interest here in the UK in bank lending data in light of Brexit. Patterns in credit flows may indicate whether it is affecting the lending choices of financial institutions and borrowing choices of people and businesses.

Data from the Bank of England’s Money and Credit – September 2016 statistical release shows net lending (lending net of repayments) by monetary financial institutions (MFIs) to individuals in September 2016 was £4.65 billion. This compares with £8.89 billion back in March 2016 which then was the highest monthly total since August 2007. However, the March figure was something of a spike in lending and this September’s figure is actually very slightly above the monthly average over the last 12 months, excluding March, of £4.5 billion. In other words, as yet, there is no discernible change in the pattern of credit flows post-Brexit.

Leaving aside the question of the economic impact of Brexit, we still need to consider what the credit data mean for financial stability and for our financial well-being. Chart 1 shows the annual flows of lending by banks and building societies since the mid 1990s. The chart evidences the cycles in secured lending and in consumer credit (unsecured lending) with its consequent implications for economic and financial-welling being.(Click here to download a PowerPoint of Chart 1.)

After the financial crisis, as Chart 1 shows, net lending to individuals collapsed. More recently, net lending has been on the rise both through secured lending and in consumer credit. The latest data show that annual flows have begun to plateau. Nonetheless, the total flow of credit in the 12 months to September of £58 billion compares with £33 billion and £41 billion in the 12 months to September 2014 and 2015 respectively. Having said this, in the 12 months to September 2007 the figure was £112 billion! £58 billion is currently equivalent to around about 3 per cent of GDP.

To more readily see the effect of the credit flows on debts stocks, Chart 2 shows the annual growth rate of net lending by MFIs. In essence, this mirrors the growth rate in the stocks of debt which is an important metric of financial well-being. The chart nicely captures the pick up in the growth of lending from around the start of 2013. What is particularly noticeable is the very strong rates of growth in net unsecured lending from MFIs. The growth of unsecured lending remains above 10 per cent, comparable with rates in the mid 2000s. (Click here to download a PowerPoint of Chart 2.)

The growth in debt stocks arising from lending continues to demonstrate the need for individuals to be mindful of their financial well-being. This caution is perhaps more important given the current economics uncertainties. The role of the Financial Policy Committee in the UK is to monitor the financial well-being of economic agents in the context of ensuring the resilience of the financial system. It therefore analyses the data on credit flows and debt stocks referred to in this blog along with other relevant metrics. At this moment its stance is not to apply any additional buffer – known as the Countercyclical Capital Buffer – on a financial institution’s exposures in the UK over and above internationally agreed standards. Regardless, the fact that it explicitly monitors financial well-being and risk shows just how significant the relationship between the financial system and economic outcomes is now regarded.

Articles

Higher inflation and rising debt threaten millions in UK The Guardian, Angela Monaghan (5/11/16)
Consumer spending has saved the economy in the past – but we cannot bet on it forever Sunday Express, Geff Ho (13/11/16)
Warning as household debts rise to top £1.5 trillion BBC News, Hannah Richardson (7/11/16)
Household debt hits record high – How to get back on track if you’re in the red Mirror, Graham Hiscott (7/12/16)

Data

Money and Credit – September 2016 Bank of England
Bankstats (Monetary and Financial Statistics) – Latest Tables Bank of England
Statistical Interactive Database Bank of England

Questions

  1. Explain the difference between secured debt and unsecured debt.
  2. What does it mean if individuals are financially distressed?
  3. How would we measure the financial well-being of individuals and households?
  4. What actions might individuals take it they are financially distressed? What might the economic consequences be?
  5. How might uncertainty, such as that following the UK vote to leave the European Union, affect spending and savings’ decisions by households?
  6. What measures can institutions, like the UK’s Financial Policy Committee, take to reduce the likelihood that flows of credit become too excessive?

In April we asked how sustainable is the UK’s appetite for credit? Data in the latest Bank of England’s Money and Credit publication suggest that such concerns are likely grow. It shows net lending (lending net of repayments) by monetary financial institutions (MFIs) to individuals in March 2016 was £9.3 billion, the highest monthly total since August 2007. This took net borrowing over the previous 12 months to £58.6 billion, the highest 12-month figure since September 2008.

The latest credit data raise fears about the impact on the financial well-being of individuals. The financial well-being of people, companies, banks and governments can have dramatic effects on economic activity. These were demonstrated vividly in the late 2000s when a downturn resulted from attempts by economic agents to improve their financial well-being. Retrenchment led to recession. Given the understandable concerns about financial distress we revisit our April blog.

Chart 1 shows the annual flow of lending extended to individuals, net of repayments. (Click here to download a PowerPoint of Chart 1.) The chart provides evidence of cycles both in secured lending and in consumer credit (unsecured lending).

The growth in net lending during the 2000s was stark as was the subsequent squeeze on lending that followed. During 2004, for example, annual net flows of lending from MFIs to individuals exceeded £130 billion, the equivalent of close on 10.5 per cent of annual GDP. Secured lending was buoyed by strong house price growth with UK house price inflation rising above 14 per cent. Nonetheless, consumer credit was very strong too equivalent to 1.8 per cent of GDP.

Net lending collapsed following the financial crisis. In the 12 months to March 2011 the flow of net lending amounted to just £3.56 billion, a mere 0.2 per cent of annual GDP. Furthermore, net consumer credit was now negative. In other words, repayments were exceeding new sums being extended by MFIs.

Clearly, as Chart 1 shows, net lending to individuals is again on the rise. This partly reflects a rebound in sections of the UK housing market. Net secured lending in March was £7.435 billion, the highest monthly figure since November 2007. Over the past 12 months net secured lending has amounted to £42.1 billion, the highest 12-month figure since October 2008.

Yet the growth of unsecured credit has been even more spectacular. In March net consumer credit was £1.88 billion (excluding debt extended by the Student Loans Company). This is the highest month figure since March 2005. It has taken the amount of net consumer credit extended to individuals over the past 12 months to £16.435 billion, the highest figure since December 2005.

Chart 2 shows the annual growth rate of both forms of net lending by MFIs. In essence, this mirrors the growth rate in the stocks of debt – though changes in debt stocks can also be affected by the writing off of debts. The chart captures the very strong rates of growth in net unsecured lending from MFIs. We are now witnessing the strongest annual rate of growth in consumer credit since November 2005. (Click here to download a PowerPoint of the chart.)

The growth in household borrowing, especially that in consumer credit, evidences the need for individuals to be mindful of their financial well-being. Given that these patterns are now becoming well-established you can expect to see considerable comment in the months ahead about our appetite for credit. Can such an appetite for borrowing be sustained without triggering a further balance sheet recession as experienced at the end of the 2000s?

Articles

Consumer credit rises at fastest pace for 11 years The Guardian, Hilary Osborne (29/4/16)
Debt bubble fears increase as consumer credit soars to 11-year high The Telegraph, Szu Ping Chan (29/4/16)
Fears of households over-stretching on borrowing as consumer credit grows The Scotsman, (29/4/16)
History repeating? Fears of another financial crisis as borrowing reaches 11-year high Sunday Express, Lana Clements (29/4/16)
The chart that shows we put more on our credit cards in March than in any month in 11 years Independent, Ben Chu (1/4/16)
Britain’s free market economy isn’t working The Guardian (13/1/16)

Data

Money and Credit – March 2016 Bank of England
Bankstats (Monetary and Financial Statistics) – Latest Tables Bank of England
Statistical Interactive Database Bank of England

Questions

  1. What does it mean if individuals are financially distressed?
  2. How would we measure the financial well-being of individuals and households?
  3. What actions might individuals take it they are financially distressed? What might the economic consequences be?
  4. How might uncertainty affect spending and saving by households?
  5. What measures can policymakers take to reduce the likelihood that flows of credit become too excessive?
  6. What is meant by a balance sheet recession?
  7. Explain the difference between secured debt and unsecured debt.
  8. Should we be more concerned about the growth of consumer credit than secured debt?

The latest Bank of England’s Money and Credit release shows net lending (lending net of repayments) by Monetary Financial Institutions (MFIs) to individuals in February was £4.9 billion. Although down on the £5.4 billion in January, it nonetheless means that over the last 12 months the flow of net lending amounted to £52.8 billion. This is the highest 12-month figure since October 2008.

The latest credit data raise concerns about levels of lending and their potential to again impact on the financial well-being of individuals, particularly in light of the falling proportion of income that households are saving. As we saw in UK growth fuelled by consumption as households again lose affection for their piggy banks the saving ratio fell to an historic low of 4.2 per cent for 2015.

An important factor affecting the financial well-being of individuals and households is the extent of their indebtedness. Flows of credit accumulate to become stocks of debt. Stocks of debt affect the extent to which household incomes becomes prey to debt servicing costs. Put simply, more and more income, all other things being equal, is needed for interest payments and capital repayments as debt stocks rise. Rising stocks of debt can also affect the ability of people to further fund borrowing, particularly if debt levels grow more quickly than asset values, such as the value of financial assets accumulated through saving. Consequently, the growth of debt can result in households incurring what is called balance sheet congestion with deteriorating financial well-being or increased financial stretch.

Chart 1 shows the stocks of debt acquired by individuals from MFIs, i.e. deposit-taking financial institutions. It shows both secured debt stocks (mortgage debt) and unsecured debt stocks (consumer credit). The scale of debt accumulation, particularly from the mid 1990s up to the financial crisis of the late 2000s is stark.

At the start of 1995 UK individuals had debts to MFIs of a little over £430 billion, the equivalent of roughly 55 per cent of annual GDP (Gross Domestic Product). By the autumn of 2008 this had hit £1.39 trillion, the equivalent of roughly 90 per cent of annual GDP. At both points around 85 per cent of the debt was secured debt, though around the start of the decade it had fallen back a little to around 80 per cent. (Click here to download a PowerPoint of Chart 1.)

The path of debt at the start of the 2010s is consistent with a story of consolidation. Both financially-distressed individuals and MFIs took steps to repair their balance sheets following the financial crisis. These steps, it is argued, are what resulted in a balance sheet recession. This saw the demand for and supply of additional credit wane. Consequently, as Chart 1 shows debt accumulation largely ceased.

More recently the indebtedness to MFIs of individuals has started to rise again. At the end of February 2014 the stock of debt was just shy of £1.4 trillion. By the end of February 2016 it had risen to £1.47 trillion (a little under 80 per cent of annual GDP). This is an increase of 4.7 per cent. Interestingly, the rise was largely driven by unsecured debt. It rose by 13.4 per cent from £159.4 billion to £180.7 billion. Despite the renewed buoyancy of the housing market, particularly in South East England, the stock of secured debt has risen by just 3.6 per cent from £1.24 trillion to £1.28 trillion.

Chart 2 shows the annual flow of lending extended to individuals, net of repayments. (Click here to download a PowerPoint of Chart 2.) The chart provides evidence of cycles both in secured lending and in consumer credit (unsecured lending).

The growth in net lending during the 2000s was stark as was the subsequent squeeze on lending that followed. During 2004, for example, annual net flows of lending from MFIs to individuals exceeded £130 billion, the equivalent of close on 10.5 per cent of annual GDP. Secured lending was buoyed by strong house price growth with UK house price inflation rising above 14 per cent. Nonetheless, consumer credit was very strong too equivalent to 1.8 per cent of GDP.

Net lending collapsed following the financial crisis. In the 12 months to March 2011 the flow of net lending amounted to just £3.56 billion, a mere 0.2 per cent of annual GDP. Furthermore, net consumer credit was now negative. In other words, repayments were exceeding new sums being extended by MFIs.

Clearly, as Chart 2 shows, we can see that net lending to individuals is again on the rise. As we noted earlier, part of this this reflects a rebound in parts of the UK housing market. It is perhaps worth noting that secured lending helps individuals to purchase housing and thereby acquire physical wealth. While secured lending can find its way to fuelling spending, for example, through the purchase of goods and services when people move into a new home, consumer credit more directly fuels spending and so aggregate demand. Furthermore, consumer credit is not matched on the balance sheets by an asset in the same way that secured credit is.

Chart 3 shows the annual growth rate of both forms of net lending by MFIs. In essence, this mirrors the growth rate in the stocks of debt though changes in the stocks of debt can also be affected by the writing off of debts. What the chart nicely shows is the strong rates of growth in net unsecured lending from MFIs. In fact, it is the strongest annual rate of growth since January 2006 (Click here to download a PowerPoint of the chart.)

The growth in consumer credit, the fall in the saving ratio and the growth in consumer spending point to a need for individuals to be mindful of their financial well-being. What is for sure, is that you can expect to see considerable comment in the months ahead about consumption, credit and income data. Fundamental to these discussions will be the sustainability of current lending patterns.

Articles

Consumer Lending Growth Highest Since 2005 Sky News, (31/3/16)
Britons raid savings to fund spending as economists warn recovery ‘built on sand’ Telegraph, Szu Ping Chan (31/3/16)
Household debt binge has no end in sight, says OBR Telegraph, Szu Ping Chan (17/3/16)
Surge in borrowing… as savings dwindle: Household savings are at an all-time low as families turn to cheap loans and credit cards Daily Mail, James Burton (1/4/16)
George Osborne banks on household debt time bomb to meet his Budget targets Mirror, Ben Glaze (29/3/16)
Britain’s free market economy isn’t working Guardian (13/1/16)

Data

Bankstats (Monetary and Financial Statistics) – Latest Tables Bank of England
Statistical Interactive Database Bank of England

Questions

  1. What does it mean if individuals are financially distressed?
  2. How would we measure the financial well-being of individuals and households?
  3. What actions might individuals take it they are financially distressed? What might the economic consequences be?
  4. How might uncertainty affect spending and saving by households?
  5. What measures can policymakers take to reduce the likelihood that flows of credit become too excessive?
  6. What is meant by a balance sheet recession?
  7. Explain the difference between secured debt and unsecured debt.
  8. Should we be more concerned about the growth of consumer credit than secured debt?

Have you ever woken in the night worrying about your finances? Most of us have. Our overall financial position undoubtedly exerts influence on our spending. Therefore, we would not expect our current spending levels to be entirely determined by our current income level.

Our financial health, or what economists call our net financial wealth, can be calculated as the difference between our financial assets (savings) and our financial liabilities (debt). Between them, British households have amassed a stock of debt of £1.423 trillion, almost as much as annual GDP, which is around £1.5 trillion (click here to download the PowerPoint.) We look here at recent trends in loans by financial institutions to British households. We consider the effect that the financial crisis and the appetite of individuals for lending is having on the debt numbers.

There are two types of lending to individuals. The first is secured debt and refers to loans against property. In other words, secured debt is just another name for mortgage debt. The second type of lending is referred to as unsecured debt. This covers all other forms of loans involving financial institutions, including overdrafts, outstanding credit card debt and personal loans. The latest figures from the Bank of England’s Money and Credit show that as of 31 March 2013, the stock of debt owed by individuals in the UK (excluding loans involving the Student Loans Company) was £1.423 trillion. Of this, £1.265 trillion was secured debt while the remaining £157.593 billion was unsecured debt. From this, we can the significance of secured debt. It comprises 89 per cent of the stock of outstanding debt to individuals. The remaining 11 per cent is unsecured debt.

The second chart shows the growth in the stock of debt owed by individuals (click here to download the PowerPoint chart). In January 1994 the stock of secured debt stood at £358.75 billion and the stock of unsecured debt at £53.774 billion. 87 per cent of debt then was secured debt and, hence, little different to today. The total stock of debt has grown by 246 per cent between January 1994 and March 2013. Unsecured debt has grown by 197 per cent while secured debt has grown by 253 per cent.

However, more recently we see a different picture evolving, more especially in unsecured debt. Since October 2008, the monthly series of the stock of unsecured debt has fallen on 47 occasions and risen on only 7 occasions. In contrast, the stock of secured debt has fallen on only 12 occasions and often by very small amounts. Consequently, the stock of unsecured debt has fallen by 23.2 per cent between October 2008 and March 2013. In contrast, the stock of secured debt has risen by 3.5 per cent. The total stock of debt has fallen by 0.4 per cent over this period.

Another way of looking at changes in the stock of debt is to focus on what are known as net lending figures. This is simply the difference between the gross amount lent in a period and the amount repaid. The net lending figures will, of course, mirror changes in the total debt stock closely. For example, a negative net lending figure means that repayments are greater than gross lending. This will translate into a fall in the stock of debt. However, some difference occurs when debts have to be written off and not repaid.

The third chart shows net lending figures since January 1994 (click here to download the PowerPoint chart). The chart captures the financial crisis very nicely. We can readily see a collapse of net lending by financial institutions to households. It is, of course, difficult to disentangle from the net lending figures those changes driven by changes in the supply of credit by financial institutions and those from changes in the demand for credit by individuals. But, we can be certain that the enormous change in credit levels in 2008 were driven by a massive reduction in the provision of credit.

To further put the net lending figures into context, consider the following numbers. Over the period from January 2000 to December 2007, the average amount of monthly net lending was £8.52 billion. In contrast, since January 2009 the average amount of net lending has been £691 million per month. Consider too the composition of this net lending. The average amount of net secured lending between January 2000 and December 2007 was £7.13 billion per month compared with £1.39 billion for net unsecured lending. Since January 2009, monthly net secured lending has averaged only £756 million while monthly net unsecured lending has averaged -£64.4 million. Therefore, repayments of unsecured lending have outstripped gross unsecured lending.

While further analysis is needed to fully understand the drivers of the net lending figures, it is, nonetheless, clear that the financial system of 2013 is very different to that prior to the financial crisis. This change is affecting the growth of the debt stock of households. This is most obviously the case with unsecured debt. The stock of unsecured debt in March 2013 is 24 per cent smaller than in its peak in September 2008. It is now the job of economists to understand the implications of how the new emerging patterns in household debt will affect our behaviour and overall economic activity.

Data

Money and Credit – March 2013 Bank of England
Statistical Interactive Database Bank of England

Articles

Bank of England extends lending scheme Financial Times, Chris Giles (24/4/13)
Markets insight: Europe and the US lines cross on household debt ratio Financial Times, Gillian Tett (9/5/13)
British families are the deepest in debt Telegraph, James Kirkup (14/5/13)
Total property debt of British households stands as £848bn Guardian, Hilary Osborne (13/5/13)
Household finances reach best level in three years – but are stuck below pre-crisis levels This is Money.co.uk, Matt West (17/5/13)
ONS says Welsh households have lowest debts in Britain BBC News (28/1/13)

Questions

  1. Outline the ways in which the financial system could impact on the spending behaviour of households.
  2. Why might the current level of income not always be the main determinant of a household’s spending?
  3. How might uncertainty affect spending and saving by households?
  4. Explain what you understand by net lending to individuals. How does net lending to individuals affect stocks of debt?
  5. Outline the main patterns seen in the stock of household debt over the past decade and discuss what you consider to be the principal reasons for these patterns.
  6. If you were updating this blog in a year’s time, how different would you expect the charts to look?

Each month the Bank of England releases figures on the amount of net lending to households. Net lending measures the additional amount of debt acquired by households in the month and so takes into account the amount of debt that households repay over the month. For some time now, the levels of net lending have been remarkably low. Over the first quarter of 2011, monthly net lending to households averaged £1.2 billion. This might sound like a lot of money and in many ways this is true. But, to put the weakness of this figure into perspective, the monthly average over the past ten years is £7 billion.

Household debt can be categorised as either secured debt or unsecured debt. The former is mortgage debt while the latter includes outstanding amounts due on credit and store cards, overdrafts and personal loans. Levels of net secured lending have averaged £1 billion per month over the first 3 months of 2011. This compares with a 10-year average of £5.8 billion per month. Levels of net unsecured lending have averaged £196 million per month over the first 3 months of 2011. This compares with a 10-year average of £1.2 billion per month. In 12 of the months between December 2008 and January 2011 net unsecured lending was actually negative. This means that the value of repayments was greater than new unsecured lending. Once bad debts are taken into account we observe from the autumn of 2008 almost persistent monthly falls in the stock of unsecured debt.

Weak levels of net lending reflect two significant factors. First, on the supply-side, lending levels remain constrained and credit criteria tight. Second, on the demand-side, households remain anxious during these incredibly uncertain times and would appear to have a very limited appetite for taking on additional credit.

Finally, a note on the stock of debt that we households collectively hold. The stock of household debt at the end of March 2011 was £1.45 trillion. This is £7.2 billion or 0.5% lower than in March 2010. The stock of secured debt has risen over this period by only £2.6 billion or 0.2%, while unsecured debt – also known as consumer credit – has fallen £9.9 billion or 4.5%. These figures help to reinforce the message that British households continue to consolidate their financial positions.

Articles

Latest data shows UK economy still sluggish Euronews (4/5/11)
Bank reveals weal lending on mortgages City A.M., Julian Harris (5/5/11)
Mortgage lending plummets by 60% Belfast Telegraph (5/5/11)
Mortgage lending down as borrowers repay debt thisismoney.co.uk (4/5/11)
Average UK household owes more than £50,000 in debts Mirror, Tricia Phillips (6/5/11)

Data

Lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Tables A5.2-A5.7).

Questions

  1. What is the difference between gross lending and net lending?
  2. What do you understand by a negative net lending number?
  3. What is the difference between net secured lending and net unsecured lending?
  4. What factors do you think help to explain the recent weakness in net lending?
  5. How would you expect the net lending figures in a year’s time to compare with those now?
  6. As of 31 March 2011, UK households had accumulated a stock of debt of £1.45 trillion. In what ways could we put this figure into context? Should we as economists be concerned?
  7. It is said that households are consolidating their financial position. What do you understand by this term and what factors have driven this consolidation?
  8. What are the implications for the wider economy of households consolidating their financial position?