Bank sounds alert on borrowing

THE EXTENT of borrowing by companies and homebuyers could pose problems in the future given the uncertain economic climate, the Bank of England said. In its twice-yearly Financial Stability Review, the Bank says economic conditions have deteriorated since its last report in June but have improved since the immediate aftermath of 11 September.

However, the Bank is optimistic about the health of the banking sector, believing it to be significantly better than during the recession of 1991.

'In the UK, there are few debt-servicing problems in the current interest-rate environment, although levels of borrowing in the corporate and household sectors could imply some future vulnerability,' said Deputy Governor David Clementi. 'The message is that the financial system faces some increase in risk and credit exposure will need to be managed carefully,' said executive director for financial stability Alastair Clark.

The Bank, which first highlighted its concern about the telecoms sector in June 2000, continues to be worried by the industry, pointing out that Barclays, HSBC, Lloyds and Royal Bank of Scotland had initial exposure to nearly £30bn of outstanding loans in October.

There is concern too about the airline industry in the wake of the 11 September terrorist attacks on the US. Britain's six biggest banks were officially exposed to more than £6bn of airline debt as of six weeks ago. Officials also highlight heavy lending to commercial property developers, suggesting the risk in this sector has increased since June.

The Bank stresses, though, that the problem is not as acute as in the recession of the early 1990s.

The insurance sector is singled out as well, suffering on the general side from the fallout from the 11 September attacks, and on the life side from falling equity prices and rule changes.

On the personal borrowing side, the Bank pointed out that debt rose by more than 10% in the year to October, the fastest rate of growth since the early 1990s.

Lending has been particularly marked in the unsecured consumer credit sector, where the risk of default is generally perceived to be higher than on secured debt such as mortgages.