Healthy Tightening in UK Credit Conditions

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This morning the much anticipated Q3 2018 Credit Conditions Survey was released by the Bank of England. The survey, conducted between August 20 and September 7, records the underlying interaction between commercial banks and the real economy, in effect a reading of the key credit transmission mechanism.

In general the survey suggests the transmission mechanism remains reasonably healthy for UK consumers and businesses. We noted that from a supply perspective, the main UK lenders reported that the availability of secured credit to households had decreased and was expected to decrease again over Q4. Looking at the survey in more detail, it is evident that the banks have been subtly tightening their lending criteria – it is becoming a bit more difficult for households with high loan-to-values to obtain more finance, for example – but overall the change was fairly negligible. Likewise the availability of unsecured credit to households also decreased slightly in Q3 and was expected to decline further in Q4. It is clear that credit scoring criteria was tightened by lenders in Q3, though the proportion of applicants being approved actually increased. So this is certainly a tightening, but a healthy one that promotes cycle longevity. 

Overall supply of credit to the corporate sector was unchanged in Q3. Supply actually showed a small increase for small businesses and was unchanged for medium and large businesses. Again, the banks expect supply to show a small decrease in Q4.

From the demand side of the equation those households looking for secured lending was broadly unchanged, though demand for re-mortgaging showed a significant increase and this is expected to be heightened in Q4. Demand for unsecured lending from consumers increased significantly in Q3, particularly via credit card lending, whereas demand from the corporate sector declined in Q3 from small and large businesses but increased slightly among medium-sized corporates. The read across here is that the consumer is confident and willing to borrow, which should bode well for Q3 GDP. 

The banks reported a small decrease in default rates for secured household loans and a slight decrease in defaults on unsecured loans, helped by a clear reduction in the number of consumers defaulting on credit card loans. Default rates on loans across all corporates increased in Q3, though actual losses were unchanged. 

So overall there were no significant changes to conditions and nothing to suggest the UK economy is being squeezed by a lack of credit. Our attention will now switch to the US Senior Loan Officer Survey in early November. Given the more mature state of the US credit cycle, and the fact that the US is already eight rate hikes into its tightening phase, we must now look very closely to see if commercial banks are picking up the tightening baton from the Fed. We would expect they haven’t just yet, but the continued flattening of the US yield curve will be on the minds of US loan officers, so this report will be a key source of cycle ageing signals.

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