UK loan write-offs - the storm that has not yet come

The current crisis afflicting UK banks is hard to see in recent loan write off data. The amount written off during the second quarter of this year was about ₤2 billion. It is large number but it is only marginally higher than earlier quarters.

In terms of total loan write-offs, consumer credit accounts for the majority of credits going bad. Only about ₤367 million worth of corporate credit was written off during the second quarter. Lending to individuals is a risky business.

The composition of consumer write-offs is quite interesting. Within this category, credit cards, overdrafts and unsecured loans accounts for about 97 percent of all bad loans. Losses on secured consumer lending, i.e. mortgages, have been minimal. In the second quarter banks wrote off only ₤57 million.

Going forward, this could change. Although mortgage lending hasn't generated much by way of bad loans in the past, it accounts for at least 80 percent of total consumer lending. It won't take much of an increase in the mortgage default rate in order to have massive impact on UK bank balance sheets.

It is the storm that has yet to come.