Compare personal loan uk

By Glenn Hoggarth of the Bank's Financial Intermediaries Division and Alec Chrystal of the Bank's Monetary Assessment and Strategy Division.

This article draws together some key indicators of financial conditions in the personal and corporate sectors, which may provide interesting insights into aspects of the behaviour of the UK economy during the course of the two most recent business cycles. Although the main focus is retrospective, this analysis could also help to assess the likely future course of important components of aggregate demand.

Introduction

In this article, we examine various key financial indicators relating to the UK personal and corporate sectors in the 1980s and 1990s. The financial health of the personal and corporate sectors is potentially important as a leading indicator of changes in consumption and investment spending. When households run into financial difficulties, they are likely to cut back on spending plans. Firms in financial difficulties will postpone or cancel investment projects.

The 1980s and 1990s both began with recessions-defined as at least two consecutive quarters o]E falling output-which were succeeded by economic recoveries. At the time of writing, the 1990s recovery phase is not yet over, although the growth rate has slowed. One complete economic cycle runs from the start of the recovery in 1981 Q1 to the peak of 1990 Q2,(1) and the 1990s recovery started in 1992 Q2. This makes it convenient to compare the two decades by aligning the period following 1981 Q1 with the period following 1992 Q2.

We note similarities and differences between the two cycles. No two cycles are ever exactly the same, both because the shocks hitting the economy vary, and because the structure of the economy evolves. The `boom and bust' in the first half of the 1970s was partly associated with the introduction of Competition and Credit Control and the subsequent return to quantitative controls on banks' balance sheets (the 'corset'). But the 1980s cycle was unusual in that it was the first cycle in the United Kingdom following a significant permanent liberalisation in the financial system (including the abolition of exchange controls and the corset, which led to a new competitive environment for banks and building societies). With these caveats in mind, the previous cycle may provide some interesting comparisons with the current one.

The article is in three sections: we first discuss some background issues, we then set out our selection of stylised facts, and finally we draw some conclusions.

Financial conditions and the business cycle

Economic cycles have three main elements: (i) the endogenous behaviour of individuals and companies, including financial ones; (ii) external shocks from the rest of the world; and (iii) policy responses from the government and monetary authorities. The way in which monetary policy changes affect the economy is known as the monetary transmission mechanism.

The monetary transmission mechanism works through four broad channels-interest rates, exchange rates, asset prices and credit.(2) All these channels were operating, to varying degrees, during the 1980s and 1990s. This article focuses mainly on indebtedness and credit market conditions, which relate, in particular, to the credit channel.

An important component of the credit channel is how the market for bank credit is affected by changes in the balance sheets of borrowers, who are dependent on bank credit, and lenders.(3) Banks and other lending institutions have the problem of imperfect information about the quality of borrowers. They try to overcome the risk of moral hazard and adverse selection by securing loans on assets, charging higher interest rates for unsecured loans, or channelling funds to borrowers with high net worth. Potential borrowers find it easier to persuade lenders that they are a good risk by offering some of their assets (especially property) as security. A financial accelerator effect has been identified: as credit expands in an upturn, asset values rise, creating further valuable collateral. A cumulative process can, it is argued, occur. In a downturn, when asset prices fall, so does the value of collateral, credit risk rises, lenders become more cautious, loan-financed spending falls, and recession typically ensues (or is made worse).

Financial conditions are described below under three headings: (i) measures of the financial heaLth of the personal and corporate sectors (Charts 1-15 and Table A); (ii) measures of the price of credit (lending rates), which reflect banks and building societies' supply of loans, as well as the personal and corporate sectors' demand for loans (Charts 16-20); and (iii) measures aimed explicitly at gauging the credit supply policies of financial institutions (Charts 21 and 22 and Table B).

The stylised facts

The following charts and tables show the paths of various financial indicators between the 1992 Q2 trough in output and 1998 Ql. These are shown alongside the paths of the same variables during the similar phase of the 1980s cycle. The period corresponding to 1998 Q1 in the previous cycle was 1986 Q4, although output continued rising for another three and a half years before it reached a peak in 1990 Q2 (shown as the vertical dashed lines in the charts). The green lines in the charts refer to the post-1992 Q2 data, and the orange lines show the 1981 Q1-1992 Q1 period.(1) References to the `corporate sector' mean industrial and commercial companies (ICCs) only, so exclude other financial institutions (OFIs) unless explicitly stated. Data definitions and sources are set out in the Appendix.

(i) Measures of the financial position of the corporate and personal sectors

Three types of measure of borrowers' financial position are presented below: measures of sectoral liquidity-interest payments as a fraction of income (income gearing) and differences between sectoral income and expenditure (financial balances and savings rates) (Charts 1-5); measures of sectoral net worth-the value of debt relative to assets (capital gearing) and variations in the price of assets (Charts 6-13); and specific measures of financial fragility-mortgage arrears and repossessions, and personal bankruptcies and corporate liquidations (Charts 14 and 15).

During both the previous and current upswing (prior to the tightening in monetary policy in 1988 and more modest tightening during the past year), income gearing for both the personal and corporate sectors was broadly flat-interest payments increased in line with incomes. The level of corporate sector (net) income gearing in recent years has been similar to that of the mid 1980s (see Chart 1). It has risen noticeably in the last year, but is still well below the level reached in 1989. Total personal sector (gross) income gearing has also been lower in recent years than during the mid to late 1980s (see Chart 2). But within total personal sector gearing, mortgage income gearing has been at similar levels during both upturns, owing to two offsetting influences: the stock of mortgage debt (relative to income) was much higher in the mid 1990s than in the mid 1980s, but the level of interest rates was lower.(2)

The ICCs' financial surplus (as a percentage of GDP) and the personal sector (net) saving rate were both positively correlated with sectoral M4 lending/income during the previous cycle (see Charts 3 and 4).(3) This suggests that during the 1980s, individuals and companies financed imbalances between current income and expenditure mainly through changes in the amount borrowed from banks and building societies, rather than through changes in other sources of borrowing or in asset holdings. During the late 1980s, the movement of the corporate sector into financial deficit was financed by a sharp rise in ICCs' M4 borrowing. Similarly, the movement of ICCs back into financial surplus during the previous recession was mirrored by a marked cutback in their M4 borrowing (as a percentage of GDP). During this recovery, the ICCs' financial balance has again moved into deficit, albeit so far a modest one. But this has not been financed by borrowing from banks and building societies to the same extent as in the late 1980s-after rising for a while in 1995-96, the flow of M4 lending to ICCs (as a percentage of GDP) has so far fallen back.