By Huw Jones
LONDON (Reuters) - The Bank of England said on Monday it could force banks to hold more capital as an "insurance policy" to protect the wider economy in case the rapid growth in consumer credit turns sour.
Alex Brazier, the BoE's executive director for financial stability, said that while lending overall has grown in line with the British economy, outstanding car loans, credit card balances and personal loans have risen by 10 percent, far outpacing rises in income.
In a period of good economic performance, banks think they can reduce prices and loosen lending criteria, he said.
"The spiral continues and borrowers rack up more and more debt," Brazier said in a speech in Liverpool.
"Lending standards can go from responsible to reckless very quickly... Lenders have not entered, but they may be dicing with, the spiral of complacency."
It is the latest warning on consumer credit from the BoE, which has already responded by introducing three "defense lines", including closer supervision of banks and tightening mortgage lending standards to stop "boundaries" being pushed, such as a rise in lending at higher loan-to-income multiples.
The third "defense line" involves stress testing lenders to check whether they hold enough capital to deal with losses.
"And to make sure this defense line is kept robust in the face of rapid consumer credit growth, we are accelerating this year's test of banks' consumer credit loans," Brazier said.
"By September we will have assessed whether the rapid growth has created any small gap in the line. If it has, we'll plug it."
Brazier highlighted car loans, saying so-called personal contract purchase or PCP from the finance arms of automakers now finance almost four in five new car purchases.
Even if a borrower makes all the monthly payments on a PCP contract, the lender can still lose money if used car prices fall.
"The finance company is left with a car that has depreciated by more than they've been paid," Brazier said.
However, the defense lines may now be starting to kick in, he said, with consumer credit showing signs of slowing and new car registrations falling.
The aim is to stop the economy having to suffer endless repeats of the "Debt Strikes Back" movie, he added.
"For now, settle back with your popcorn and watch the, oddly, not yet highly grossing, new blockbuster, the Return of the Regulator."
(Reporting by Huw Jones; Editing by Gareth Jones)