British lenders reported falling levels of credit in the second quarter and expect further tightening of credit conditions in the coming months as appetite for risk in the financial services wanes.
The Bank of England's Credit Conditions Survey polled lenders between April to mid-June who reported that the availability of unsecured credit to households – credit cards and bank loans – decreased in the second quarter.
Lower risk appetite weakens supply
Lenders reported a changing appetite for risk was an important driver, with a changing economic outlook also affecting expectations for the third quarter.
The availability of secured credit to households – such as mortgages – increased in the second three months, but lenders expected this to fall in the July-September period.
Recent data from the British Bankers' Association showed that mortgage approvals in May dropped to an eight-month low, while approvals for remortgaging in May were 10% lower than in the previous year.
Credit demand continues to climb
Demand for credit continued to climb, however, particularly in the corporate sector as lenders saw a "significantly increased demand" from both small and medium sized businesses in the second quarter.
Lenders expected, however, that corporate borrowing would decrease in the third quarter as lower capital investment was seen as a drag on demand.
Brexit fuels economic uncertainty
Economic uncertainty has been exacerbated by Brexit negotiations and political instability and borrowers and lenders alike are shying away from taking additional risks in such an environment.
"The Global Economic Policy Uncertainty Index is higher than during the global financial crisis and Brexit remains a significant source of this uncertainty following the UK’s hung parliament vote in June," said Bill Street at State Street Global Advisors.