Banks Reducing Credit in the UK

 
The United Kingdom is seeing banks reduce credit for consumers and corporations, as the credit crunch ripples around the globe, according to press reports in several publications.

The London Timesonline reports that large banks “are slashing credit card limits and turning away droves of borrowers in a consumer credit crackdown. Banks hope that by tightening up lending standards they will cut the cost of servicing problem borrowers.”

Barclaycard has cut the credit limits on about half a million of its customers and rejected more than half of all applicants for new products in the last 18 months, according to myfinances.co.uk. The actions may have lowered Barclaycard’s bad debt by 9 percent in the first half of this year. Parent Barclays is reportedly considering selling FirstPlus, a secured consumer loan business, for less than its $9.1 billion loan book is worth.

There was also a run on the Northern Rock Bank, with consumers standing in line to withdraw a reported $4.0 billion in funds in three days, according to Bloomberg News. The Bank of England shored up the institution but not before photos were flashed around the world indicating troubles in the United Kingdom. Buyers are now circling Northern Rock seeking to acquire the wounded bank.

In addition, there have been regulatory changes that driven banks to retreat behind their castle walls. The Timesonline reports that new international solvency rules had forced HSBC “to take a tougher line on credit limits. The new rules require banks to have an extra capital cushion for unused credit in card or overdraft facilities. That imposes an extra cost on a bank if it offers a customer a credit line on which he is not drawing at present.”  

A survey by the Bank of England found that financial institutions cut lending to companies in the third quarter, according to a story today in The Wall Street Journal. Lenders expect default rates on corporate loans to rise in the fourth quarter and impose stricter condition on loans, according to the Bank’s Credit Conditions Survey. "Lenders reported that the had reduced corporate credit availability over the past three months … (and expect) to reduce significantly their capacity to extend credit over the next three months," according to the survey.

The cutbacks and bad news have caught the attention of British consumers, according to the Daily Express. It reports that British households put a record $95.5 billion into various savings-related accounts in the April-June quarter, while the amount borrowed through credit cards, overdrafts and loans fell to $7.7 billion.

Debt-heavy consumers are looking for help with the need for the Consumer Credit Counseling Service is rising. “We received 18 to 20 per cent more calls to our helpline over the first six months of 2007 than in the same period last year,” James Ketchell, of CCCS, told the Timesonline. “The banks are making it a lot tougher to obtain credit.”