Bloomberg News

BOE Says U.K. Lenders Expect to Tighten Criteria on Loans

January 06, 2012

(Updates with services data in fifth paragraph, comment from economist in sixth.)

Jan. 5 (Bloomberg) -- U.K. banks expect to toughen the criteria on loans to companies and households in the first quarter because of strains in wholesale funding markets, which may impede investment and economic growth.

“Lenders expected a tightening of credit-scoring criteria for granting” mortgages and a “tightening of covenants on loans to large and medium-sized companies,” the Bank of England said in its fourth-quarter Credit Conditions Survey published in London today. “Developments in the euro area and their impact on banks’ funding conditions would be a key determinant of credit availability over the coming quarter.”

Data from the central bank yesterday showed mortgage approvals were little changed in November, underlining the fragility of the housing market. The Bank of England said in December that risks to U.K. financial stability from the euro- area sovereign debt crisis have increased and “stronger action” is needed to make banks more resilient to potential shocks so that they can continue to lend.

“Although lenders expected a small increase in overall credit availability in the coming three months, factors such as the economic outlook and tighter wholesale funding conditions were expected to impact negatively on credit availability,” the Bank of England said today.

Services Growth

A separate report today showed U.K. services strengthened in December, with an index for the industry rising to a five- month high of 54 from 52.1 in November. Related surveys earlier this week showed that factory and building activity also improved last month.

The reports suggest that the recovery “regained some momentum at the very end of last year,” said Vicky Redwood, an economist at Capital Economics Ltd. in London. “However, we expect this to be short-lived -- not least because of the prospect of continued weak bank lending, as highlighted by today’s Bank of England’s Credit Conditions Survey.”

Today’s Bank of England survey also showed that mortgage demand fell in the fourth quarter and banks expect a further decline in the current three months. Demand for loans from small companies will probably drop in the first quarter after it fell “sharply” in the fourth quarter. For large and medium-sized companies, loan demand will also probably decline in the current quarter, the central bank survey said.

Household Income

On mortgages, lenders said they expected the proportion of loan applications being approved to fall in the current quarter as a result of the tighter credit-scoring criteria. Some banks have “revised down expectations for households’ disposable incomes and hence the affordability of taking out new secured loans,” the survey said.

The Bank of England’s Financial Policy Committee said last month that while the impact of the euro crisis on the cost of loans had so far been “relatively muted,” if funding stresses persist “credit conditions could be expected to tighten materially in 2012.”

A gauge of demand for mortgages fell to minus 21.2 in the fourth quarter from 15.3 in the previous three months, the Bank of England said. The expectations index for the first quarter was minus 6.8. A measure of mortgage availability fell to 1.9 in the fourth quarter from 8.4.

For companies, the index of credit availability rose to 11 in the fourth quarter from 3.9. The first-quarter measure was 8.1. Demand for loans from medium-sized companies was at minus 1.6 in the fourth quarter and minus 9.2 for the current quarter. Demand among large companies was 1.5 in the fourth quarter and minus 5.2 in the first three months of 2012.

The BOE survey was taken among U.K. lenders between Nov. 22 and Dec. 13. It also showed that an index of default rates on mortgages fell to minus 24.4 from minus 12.3. A gauge of losses from defaults rose to 14.6 from minus 0.8. The expectations index on losses for the next three months was at 9.7.

--Editors: Fergal O’Brien, Eddie Buckle

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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