The Bank of England has told banks they must put aside another £11.4 billion over the next 18 months amid a lending crackdown, as it warned the economy faces a “wide range” of risks.
The Bank raised fears over surging levels of unsecured consumer borrowing on credit cards and car finance, which is rising by more than 10% a year and outstripping incomes.
It announced plans that will see banks build up their capital buffers by £5.7 billion initially, with aims to instruct them to bolster reserves by another £5.7bn in November.
In its bi-annual financial stability report, the Bank also said it will tighten affordability tests for mortgage lending, over worries the banking sector has become too reliant on “benign” economic conditions.
It said the Financial Policy Committee (FPC), headed by Bank governor Mark Carney, was continuing to work on contingency planning for a “range of possible outcomes” of Brexit negotiations.
These will help “mitigate the risks to financial stability as the withdrawal process unfolds”, it said.
The Bank said measures outlined in the report aim to boost the resilience of the financial sector to the “wide range of risks it faces”.
It said the biggest risk was the rapid growth of consumer lending, with car finance having rocketed by around 15% and credit card borrowing by almost 10%.
The Bank added: “Lending conditions in the mortgage market are becoming easier.
“Lenders may be placing undue weight on the recent performance of loans in benign conditions.”
It will increase the so-called counter-cyclical buffer for banks from zero to 0.5% and again to 1% in November, if the wider economy remains stable, although banks will have 18 months to meet the increased limit.
This sees it scrap an emergency policy brought in last year after the Brexit vote, when the buffer rate was slashed to zero, allowing banks to release reserves to help ward off the threat of recession.
The economy has since proved surprisingly resilient, although growth slowed sharply to 0.2% in the first quarter.