Credit providers are underestimating the risks of higher borrowing among Britons, policymakers warned.
The Bank’s Financial Policy Committee (FPC) said debt levels could again shake banks to the core if the country were to go through another economy crisis.
In a statement, the committee said: “Within a benign overall domestic credit environment, there is a pocket of risk in the rapid growth of consumer credit.
“This is not a material risk to economic growth, as consumer credit represents only 11 per cent of overall household debt.
“It is a risk to banks’ ability to withstand severe economic downturns.”
Lenders are using the wrong benchmarks to assess lending, the FPC warned.
It added: “Lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality.
“As a result, they have been underestimating the losses they could incur in a downturn.”
Commercial banks are now collectively exposed to potential losses of around £30 billion, representing about 20 per cent of UK consumer credit loans, according to the FPC.
New capital buffers requirements will be set for individual lenders after the next set of stress test results are published on November 28.
The tests are meant to measure how UK lenders would fare in an economic downturn and under difficult market conditions.
The FPC said it expects that banks will begin to factor these market-wide levels of stressed losses on consumer credit into their overall lending and capital plans, which means the cost of borrowing could increase.
Paul Hollingsworth, UK economist at Capital Economics, said: “It should be noted that the FPC does not think that the recent rapid growth in consumer credit poses a risk to economic growth, through a sharp pull-back in consumer spending.
“Instead, it thought that banks have been placing too much weight on the recent low level of losses on consumer credit as an indication of an improvement in the underlying quality of loans, rather than a reflection of the supportive macroeconomic environment.
“As a result, the Bank of England’s stress test scenario results in around one in five consumer credit loans being written off.”
Separately, the FPC said it was likely to raise the countercyclical capital buffer to one per cent at its November meeting, which is meant to provide cash padding in the event of a banking crisis.
The Bank will also continue to monitor the effects of Brexit, particularly in light of the…