sterling
The Bank of England ordered banks to set aside additional funds to cover the risk of bad loans in June Reuters

Banks in the UK may be entering a "spiral of complacency" over household lending, with the rise in consumer credit potentially posing a threat to the economy, a senior Bank of England official has warned.

Alex Brazier, the bank's director for financial stability, said outstanding car loans, credit card balances and personal loans had increased by 10% over the past year, while household incomes had risen by only 1.5%.

Car finance has grown by 15% over the past 12 months and more than 100% in the last four years. Cars bought under a personal contract purchase plan account for almost four in five new purchases, compared to one in five a decade ago.

Brazier said these were "classic signs" of banks thinking the risks were lower in a period of good economic performance and low loan losses.

"Lenders have been the lucky beneficiaries of the benign way the economy has evolved," he said in a speech at the University of Liverpool.

"In expanding the supply of credit, they may be placing undue weight on the recent performance of credit cards and loans in benign conditions."

Brazier added that the bank had put in place defence measures to strengthen lenders' resilience to losses. Last month, Threadneedle Street told banks to set aside an additional £11.4bn ($14.9bn) over the next 18 months to cover the risk of bad loans.

"Lending standards can go from responsible to reckless very quickly," Brazier said.

"The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing."

Brazier said the bank would accelerate this year's stress test of banks' consumer credit loans.

"By September we will have assessed whether the rapid growth has created any small gap in the line," he stated. "It it has, we'll plug it."