With banks under pressure to
supply credit, but the regulatory environment becoming more
restrictive the likelihood of a credit gap opening up is
increasing. Louise Naughton looks at a new report that explores the
banking industry’s perspective on this possibility and its
consequences.
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The pressure on
banks to extend credit to consumers and SMEs in order to fuel
economic growth is growing, but at the same time, governments are
looking for ways to tighten regulatory environments.
Sensing the increasing strain
between these two opposing two opposing forces, financial analytics
company FICO joined forces with the European Financial Marketing
Association (Efma) to conduct research into the European credit
market, with a view to building a picture of both today’s and
tomorrow’s credit outlook.
In the first European Credit Risk
Outlook, risk professionals across 32 European countries were asked
for their insight into the potential growth and challenges involved
in the granting of consumer credit.
As well as giving a pan-European
snapshot of the future of the credit market, the report also gives
a further break-down of specific responses in key European areas –
Germany, Austria and Switzerland (DACH), Iberia (Spain and
Portugal) and the UK and Ireland.
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By GlobalDataThe report starts by showing that
47% of respondents across the European countries expect card
delinquencies to worsen and claims this figure is not surprising
given the mixed acceptance of credit cards across Europe and the
historical susceptibility of credit card delinquencies to
variations in interest rate. It assumes that 20% of those
respondents may also expect a return to spending by better-quality
credit consumers or a withdrawal from usage by certain card issuers
after rates increase.
DACH respondents are markedly more
optimistic when it comes to card delinquencies, believing them to
improve by 44% over the next six months. However, responses from
the Iberian Peninsula are said to reflect the generally poor
economic conditions as they indicate no improvement in any lending
category, including that of credit cards, a pessimism which is
further compounded by 90% of respondents expecting delinquency to
further worsen in every category.
Results in the UK & Ireland
suggest that cards are the area of greatest diversity in risk
appetite and risk policy for the UK market. While 50% of
respondents expect credit card delinquency to worsen, more than 35%
expect to see delinquency by cardholders improve.
Supply and
demand
The credit
supply among European financial institutions has tightened as
lenders responded to difficult economic times and rising
unemployment. But respondents claim that while the amount of credit
provided is expected to rise, demand for credit is expected to rise
faster. Therefore, consumers and business owners are likely to
perceive a ‘credit gap’ for some time.
A return to ‘cautious growth’ has
been forecasted as the report shows 62% of respondents say that
consumers will request more credit but only 47% believe the amount
of credit extended will increase, with 17% even claiming the supply
will decrease.
“The fact that demand will exceed
supply is in some ways heartening, as it suggests consumer spending
and risk appetites may be regaining strength after a period of
relative disinterest,” says the report.
Despite the pessimism expressed by
DACH respondents concerning delinquencies, 78% expect the amount of
consumer credit extended to rise and 44% predict that approval
criteria will relax. In addition to this, 50% expect consumer
credit balances to rise across the DACH region. The report claims
this suggests there may be a credit supply surplus unique to DACH
and that improvement in borrowing demand would be welcome.
The report noted no surprise once
again that respondents in the Iberian region predict little
improvement in either the supply or demand of consumer credit.
The UK and Ireland appear to be the
most balanced European region, with a slightly higher proportion of
those surveyed (46%) expecting growth in credit extension compared
to those expecting an increase in demand for consumer credit
applications (38%).
“UK and Ireland respondents appear
to be more aligned with expectations for a blend of growth and
caution around consumer credit than elsewhere in Europe, and
especially more than either the DACH or Iberian respondents,” says
the report.
The credit market has been hit by
extensive regulations that require lenders to assess borrowers
‘affordability’ – ie, whether they can afford new credit. This
process may step beyond the traditional calculation methods of
“debt-to-income ratios”. The majority (83%) of those surveyed said
they had such measures in place and 14% indicated that they plan to
adopt such measures.
Regulatory
pressure
The report warns variance in
national focus on affordability regulations and measures may have
the unintended consequence of disrupting the competitive
equilibrium the European Commission would like to see in their goal
to harmonise the availability of credit and costs from credit
products across the EU.
Risk managers are said to have
“clearly stated” that some of the tightening in credit supply will
be down to regulatory pressures, with a third of respondents
claiming the Basel III requirements for higher capital reserves
alone will cause consumer lending to decrease.
More than half (52%) of respondents
said consumer protection regulations would also lead to a decrease
in consumer lending. The report says the Credit Card
Accountability, Responsibility and Disclosure (CARD) Act, which
came into effect in the US in May 2009, has already caused one
lender to eliminate 15% of its current card portfolio in order to
maintain profitability.
“This is the risk of protectionist
regulation – despite beneficial intent, the unintended consequence
may be to reduce credit access for the consumers that need it,”
says the report.
The forecast of an increase in
consumer demand for credit is indeed “heartening” as the report
suggests, but if the supply doesn’t follow closely behind, a
‘credit gap’ is not the ideal situation for banks or consumers. If
there is still a perceived tightening on credit access, consumer
confidence will remain low and this will impact the levels of
credit demand.
A balance between the two will need to be found but as the list
of regulations with various “unintended consequences” continues to
grow; this will not be an easy process.
See also: Small businesses crying for credit, but who will
supply it?
