Amid Bank of England warnings of potential risks facing financial markets, the industry should be preparing itself for changing economic conditions, according to a leading industry figure.
The Bank of England financial policy committee recently warned that it fears lenders may be under-estimating the impact of a rise in defaults in an economic downturn, predicting losses of up to £30 billion in the severest cases.
It is a risk to banks’ ability to withstand severe economic downturns, because this asset class is disproportionately more likely to default, the committee said.
The committee added that regulatory capital buffers for individual firms will be set following stress test results so that each bank can absorb its losses on consumer lending, alongside all the other effects of a downturn on its balance sheet.
Karl Werner, CEO of MotoNovo Finance’s motor division, said: “There can be little doubt that the consumer credit market is set to face major change, with an increase in interest rates now firmly on the cards and the Bank of England signalling for increased lending prudence.
“Following virtually a decade of upward growth for our sector, the motor finance sector needs to be prepared for what, for many, will be a new experience, rising interest rates and tighter credit conditions.”
There has been a growing concern about the expansion of consumer indebtedness and the capacity of consumers to manage their credit in the event of a rise in interest rates, which is becoming more certain as economic growth continues.
Werner added: “The winds of change in consumer credit have been building for a while now; it is time to re-calibrate in certain areas, notably risk management and pricing.
“As a business, our success and that of our dealers has come from a long-term approach and seizing ‘first mover advantage’ in areas such as innovation and technology. To secure long-term success and to support customer retention, we will not be afraid to move first to help secure the long-term future of dealer finance. No dealer benefits from choosing a lender with a model which proves unsustainable.”
MotoNovo Finance, based in Cardiff, specialises in automotive finance and has been operating for more than 40 years. It is part of WesBank, South Africa’s largest financer of cars, itself part of FirstRand Bank.