BoE warns of potential surge in unsecured loan losses

(Sharecast News) - Covid-19 could cause higher bank losses on unsecured debt than on mortgages with implications for financial stability, the Bank of England said.
Lower income households have suffered financial pressure during the Covid-19 crisis and these households are more likely to hold unsecured debt and not mortgages, the BoE said in an online post.

Unlike high-income borrowers, lower income households are more likely to spend a higher share of their income repaying unsecured debt and are more likely to go into arrears on this debt, the BoE said. Lower income households have also been less able to cut spending because more of their money goes on food, utilities and other essentials.

Unsecured debt losses increase with unemployment, meaning the increase in joblessness predicted by the BoE could lead to higher losses on unsecured debt. Bank losses on unsecured debt can exceed those on mortgages because people are more likely to default on credit cards and consumer loans and lenders do not have collateral to help absorb losses, the BoE said.

"This potential for large unsecured debt losses has implications for the resilience of the UK banking sector," the BoE said.

Many economists think the worst economic effects of the Covid-19 crisis are yet to come as the government reduces its support for jobs and businesses. Chancellor Rishi Sunak has talked about protecting "viable" jobs while the government has introduced fresh restrictions on businesses such as pubs and restaurants that employ low-paid workers.

The BoE's Financial Policy Committee judged in August that the big UK banks and building societies were able to withstand a scenario in which unemployment hits 15% and total unsecured debt losses exceed £30bn, the BoE said.