Consumer debt getting out of control warns Financial Services Authority.

Crowley · 2006-01-26T23:22:25+00:00

FSA fears consumers can't afford debts By Robert Miller (Filed: 26/01/2006) $2&sSheet=/money/2006/01/26/ The City's top watchdog warned banks, building societies and finance houses yesterday they could suffer severe damage to their reputations if the current turn in the lending cycle reveals "they have given credit to large numbers of consumers who are unable to afford their debt repayments". In its Financial Risk Outlook 2006 the Financial Services Authority said: "Even in the current benign economic environment we are seeing signs of growing distress among consumers, including more insolvencies, more late payments on credit cards and a rise in mortgage repossession orders." The FSA said: "Our research shows that many consumers with significant borrowing commitments are currently struggling to keep up, with repayments." The watchdog also expressed concern that rising household debt problems, coupled with the current economic slowdown, meant consumers were taking financial decisions "with inadequate understanding of the potential risks." In the wake of misselling scandals, such as those involving personal pensions, endowment mortgages and split capital investment trusts, the FSA noted that many people "have become increasingly disengaged from the market". It also said some regulated firms were failing to make their product literature and sales processes "sufficiently transparent. There remains concern this could lead to unsuitable products being sold to consumers who, in reality, have a low-risk appetite and low risk tolerance." The FSA also warned large banks and trading houses that they need to do more "stress" tests on their portfolios of sophisticated and complex investment instruments, such as credit risk derivatives, to be able to cope with a sudden shock to the world's financial systems. These, it said could take a variety of forms including "natural disasters (possibly driven by climate change), global pandemic, political instability, in a major economy, a...

Jan 26, 2006 24 Replies

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Tim 20 years ago

"M Holmes" wrote

Not only those with debts - according to your comments earlier, *depositors* would be in trouble too - because they can't get their money out of the banks!

In fact, the depositors would arguably be **worse** off than the debtors.

At least the debtors can go bankrupt...

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M Holmes 20 years ago

Fair point.

In fact after most such incidents, legislation is enacted to preent mass bankruptcy and some sort of political settlement is reached whereby debtors must continue to try to pay off at least some of their debts.

Essentially it becomes politically and financially infeasible for a government to permit those in debt to simply renege on them because this would lead to total financial collapse.

FoFP

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Graham Murray 20 years ago

But the borrower does not have to sell the asset in order to continue the repayments. So why does the situation have to lead to deflation. Why can the scenario not be more - the borrow cannot afford to sell the asset for less than the outstanding loan and other borrowers are in the same situation. This leads to less of that particular asset being available for purchase, but buyers may still want to buy the now scarce asset which will tend to increase the price.

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M Holmes 20 years ago

The aforementioned mechanism of people reneging on or paying down debts and consequent effects on the money supply.

It usually runs like that after normal periods of overexcitement in asset markets. Credit bubbles though have had a very strong tendency to lead to deflations.

FoFP

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Alex Butcher 20 years ago

says the limit is 31.7K GBP per depositor.

Best Regards, Alex.

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