Credit starts to flow, but more defaults ahead

The second-quarter Credit Conditions Survey, published on July 2, found that credit availability had increased slightly over the three months to mid-June - both secured household lending and lending to corporate borrowers had increased, driven by the lower cost and greater availability of funds.

However, lenders said both default rates and loss rates had risen, and were expected to carry on rising on both household and corporate loans.

The Bank said lending had increased as a result of the UK government's Asset Protection Scheme, which protects banks against losses from their portfolios of toxic assets, in return for agreements to increase household and business lending.

However, the continuing fall in house prices had driven up default rates and losses on mortgages, and demand for remortgaging had continued to fall. The weaker economy also meant demand for credit for small businesses fell unexpectedly over the second quarter of the year, although it is expected to pick up later in the year. Unsecured lending to households is being reduced as losses and default rates rise, especially on non-credit card lending - which some lenders also blamed on the weaker economy.

Within the corporate sector, commercial property loans fell again, reflecting continuing poor performance. But lenders "did not anticipate further significant falls in credit availability", the survey found. Lenders were demanding more collateral and tighter covenants from business customers, however.

Spreads on both household and business loans had widened, reflecting higher expected losses, and business loan spreads were expected to go on widening in the third quarter of the year, the survey added.

See also: BIS warns of "enormous risks to recovery"
Bank of England calls for "credible threat of closure"
Lloyds asset protection deal sends shares tumbling
RBS signs up to UK's asset-protection scheme