Losses Frighten; Regulators Tighten

by Brian Riley 0

What goes around comes around. One of the ways you survive in the payments business is by keeping an eye on other markets; here we see regulators in the UK tightening loan loss reserves.  AU, CA, FR, GE, US markets keep your eye on the ball!

And, with every financial institution in the planning stages for their 2018 budgets, pay close attention to details; forget optimism for now.

  • British lenders need to hold around an extra 10 billion pounds ($16.6-billion Canadian) in capital to guard against increased risks from rapidly rising unsecured consumer lending, the Bank of England said on Monday.

  • Bank’s Financial Policy Committee said it would tell banks by the end of the year how much extra capital to hold, based on the riskiness of their lending.

Part of the concern is unique to the UK, as Brexit adds uncertainty to capital markets, but the with common trends in growth, other markets must pay attention.

Credit card accounting dynamics rely on accrual accounting to recognize income as it bills, up to a certain extent.  As delinquent cardholders age, card companies must build loan loss reserves to protect against shock.  When delinquencies rise on 60 day accounts, bankers must begin to squirrel away money to cover risk in their Allowance for Loan Loss (ALL) financial lines.

Inaccurate forecasting causes havoc because if you do it improperly, there will be immediate implications.

  • On consumer credit, the central bank said that in a crisis situation – with unemployment more than doubling and the Bank’s interest rate spiking to 4 per cent – British lenders should expect to write off 20 per cent of their loans.

Now, in the US, when the loss rate hit 10%, not one major issuer posted a profit.  In the UK regulator’s doomsday scenario of 20%, expect massive bank failure.

For those of you responsible for 2018 planning, Mercator Advisory Group suggests three mantras: Slower growth, tighter process control, slimmer profit lines.  Keep that in mind, and you will likely make it into 2019 planning.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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