Banks risking £30bn hit following economic shock to consumer debt market - BoE

The caution comes as a result of the findings of a stress test scenario which modelled the effects of a financial crisis that created an environment of sharply rising interest rates and unemployment.

In such a scenario, the BofE’s Financial Policy Committee said it expected banks would have to write off 20 per cent of their loans.

The FPC said there were “pockets of risk” in the current level of lending on loans, overdrafts and credit cards and banks must hold around an extra £10 billion to guard against the effects of shock a shock to the fast-growing consumer credit sector.

Since the last financial crisis 10 years ago, the Bank has consistently expressed the need for vigilance over growth in the consumer credit market during “benign” economic conditions.

“Lenders have been underestimating risks in consumer credit,” the BoE’s executive director for financial stability, Alex Brazier, said.

“Losses in (the) stress test scenario this year will be as big as in the financial crisis.”

The latest warning comes after those made earlier this summer by another of the Bank’s arms - the Prudential Regulation Authority – which ordered banks to address specific concerns about their treatment of consumer credit.

The FPC said it would tell banks by the end of the year how much extra capital they need to hold, based on the risks of their individual lending.

The Bank of England has kept interest rates on hold at their post-Brexit low of 0.25 per cent - but warned earlier this month that a rise is “likely” in the “coming months” if inflation continues to surge above its 2 per cent target.

While prices have risen as import costs were raised by the post-Brexit vote collapse in sterling’s value, wage growth has remained static at 2.1 per cent as unemployment has fallen to its lowest level since 1975.

When the inflation figure of 2.9 per cent is taken into account it means the squeeze on family budgets is intensifying.

Consumer credit, which also includes car finance, rose by 9.8 per cent in the year to July, but has been at double-digit levels in recent times.

This has prompted fears from debt charities that families are relying on debt at a time of low wage growth – the cost of which would be felt in the event of a sharp economic shock.