BoE tells banks not to relax lending standards

The Bank of England yesterday warned commercial banks not to let their credit officers "walk on water" and relax their lending standards in the expectation that bad debts would continue to remain low.

Michael Foot, an executive director of the Bank of England, also cautioned banks against basing lending decisions on assumptions that the next economic downturn would be like the last one.

He advised banks not to abandon their minimum margins on pricing just because their rivals had.

Neither should they sacrifice covenants, which give them the right to intervene in the affairs of a borrower and suggest remedial action, because it would leave them vulnerable to the accuracy of their original lending decision.

He also said banks should resist being influenced by shifting sentiment towards "hot" markets, products or industries. "One excellent discipline here is to regularly ask yourself why you think more about the economics and risks of mandate X than your competitors.

"No satisfactory answer to this very basic question maybe means you don't want that mandate after all."

Banks were crippled by soaring bad debt provisions in the early 1990s when economic recession coincided with the end of a housing boom. After battling to cut these provisions, banks are experiencing lower bad debts as a result of the economic recovery and in recent months the Bank of England has been warning banks not to be duped into lending money more freely because their bad debts have fallen.

This could also happen because banks are beginning to assume that the low-inflation environment will mean that swings in nominal interest rates may be less severe than in previous decades.

Mr Foot said it was still a matter of debate whether this would actually reduce bad debts. "But, even it if it does, the point I am making is that the bad debt experience of the last three years had been by any standards exceptionally low; and it is exactly at such points in the lending cycle in the past that credit officers begin to think that 'it is always going to be like this' or in the worst cases, that they can walk on water."

He urged banks not to ignore the information of the early 1990s when recession hit and interest rates soared.

It would be far too simplistic to assume that all default risk would be eliminated by more stable macro-economic conditions.

News
More than 90 years of car history are coming to an end with the abolition of the paper car-tax disc
newsThis and other facts you never knew about the paper circle - completely obsolete tomorrow
News
Kim Jong Un gives field guidance during his inspection of the Korean People's Army (KPA) Naval Unit 167
newsSouth Korean reports suggest rumours of a coup were unfounded
Arts and Entertainment
You could be in the Glastonbury crowd next summer if you follow our tips for bagging tickets this week
music
Life and Style
It is believed that historically rising rates of alcohol consumption have contributed to the increase
food + drink
PROMOTED VIDEO
News
people
News
i100
News
Piers Morgan tells Scots they might not have to suffer living on the same island as him if they vote ‘No’ to Scottish Independence
peopleBroadcaster has a new role bringing 'the big stories that matter' to US
Life and Style
fashion
Arts and Entertainment
Kylie performs during her Kiss Me Once tour
musicReview: 26 years on from her first single, the pop princess tries just a bit too hard at London's O2
News
people'I’d rather have Fred and Rose West quote my characters on childcare'
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
Moves to regulate e-cigarettes and similar products as medicines come amid increasing evidence of their effectiveness
healthHuge anti-smoking campaign kicks off on Wednesday
Voices
The erotic novel Fifty Shades of Grey has already been blamed for a rise in the number of callouts to the fire brigade for people trapped in handcuffs
voicesJustine Elyot: Since Fifty Shades there's no need to be secretive about it — everyone's at it
Arts and Entertainment
A new Banksy entitled 'Art Buff' has appeared in Folkestone, Kent
art
Arts and Entertainment
Shia LaBeouf is one of Brad Pitt's favourite actors in the world ever, apparently
filmsAn 'eccentric' choice, certainly
Sport
footballBut the Newcastle United midfielder's news has 'left his mistress furious'
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?
Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

Homegrown ballerina is on the rise

Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
Education, eduction, education? Our growing fascination with what really goes on in school

Education, education, education

TV documentaries filmed in classrooms are now a genre in their own right
It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

It’s perfectly reasonable to negotiate with villains like Isis

So why don’t we do it and save some lives?
This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

Is a sub-2-hour race now within sight?

Dennis Kimetto breaks marathon record
We shall not be moved, say Stratford's single parents fighting eviction

Inside the E15 'occupation'

We shall not be moved, say Stratford single parents
Air strikes alone will fail to stop Isis

Air strikes alone will fail to stop Isis

Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
Nadhim Zahawi: From a refugee on welfare to the heart of No 10

Nadhim Zahawi: From a refugee on welfare to the heart of No 10

The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
Witches: A history of misogyny

Witches: A history of misogyny

The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
Shona Rhimes interview: Meet the most powerful woman in US television

Meet the most powerful woman in US television

Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

Endangered communities photographed 'like Kate Moss'

Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style