Bank of England warns banks about risky lending after borrowing surge

David Milliken

* UK consumer borrowing boosted by easier credit - BoE

* BoE flags interest-free credit cards, bigger personal


* Outlook darker for UK households as prices rise, wages


(Adds detail, analyst reaction)

LONDON, April 4 (Reuters) - A surge in consumer lending

means British banks are at risk of incurring losses, the Bank of

England said on Tuesday, warning that some might be letting

credit standards slide as they compete to offer debt to


Consumers ramped up their borrowing by more than 10 percent

late last year, the fastest growth in a decade, which helped

drive strong economic growth despite June's vote to leave the

European Union. Rates of saving fell to their lowest in more

than 50 years.

But the economic outlook is now darkening as households face

rising living costs in the wake of sterling's tumble against the

dollar and the euro, and wage growth is expected to remain below

its long-run average.

Last week the BoE said it was taking a closer look at

consumer borrowing, and on Tuesday it gave more details.

"An easing in credit supply conditions appeared to have

contributed to the growth in consumer credit, with intense

competition in some segments of the market," the BoE said in a

summary of the latest meeting of its Financial Policy Committee,

which looks at financial stability risks.

Credit card companies were offering longer interest-free

periods to entice borrowers, while other lenders were offering

larger unsecured loans and had cut the interest rates they

charged by more than for less risky mortgage rates.

The Financial Conduct Authority, a separate regulator,

proposed on Monday that credit card companies should freeze

lending to some of the 3.3 million Britons who paid more in

interest and charges than they have repaid debt.

The BoE is now also looking into the risks from Britain's

lending boom, and could take steps before the end of the year.

But BoE Governor Mark Carney said in January it would be a

"big call" for the central bank to rein in rapid growth in

consumer lending.

Peter Richardson, a banking analyst at Berenberg, welcomed

the BoE's latest focus on consumer credit. Many lenders and

investors wrongly assumed that current low levels of loan

defaults would persist, even when the economy weakened.

"We think the growth and terms currently seen in consumer

credit markets show strong signs of cyclical risk illusion," he

said, adding he had recently cut his outlook on Lloyds Banking

Group, one of Britain's biggest lenders, to 'sell'.

Consumer borrowing accounts for less than 10 percent of

banks' stock of lending to British households and companies,

while mortgage lending makes up about 70 percent.

But the BoE said the relatively short-term nature of much

consumer lending meant the average credit quality of a loan book

could deteriorate much faster than was the case with mortgage


The BoE has said banks could face 18.5 billion pounds ($23

billion) of losses on consumer loans in the event of a sharp

economic downturn, compared with 11.8 billion pounds for


Some Britons are already running into difficulty.

StepChange, a debt charity, said last week that a record 600,000

people contacted it for help last year.

($1 = 0.8044 pounds)

(Additional reporting by Huw Jones; Editing by William

Schomberg and Catherine Evans)