Last year the Centre for Responsible Credit was commissioned by The Commonwealth to provide a discussion paper on rising levels of household debt and how to mitigate its impacts for households and economies.
The paper was based on a review of several Commonwealth countries’ household debt levels and the different policy responses being adopted. It was presented to the Commonwealth Central Bank Governors Meeting held at the IMF/World Bank in Washington DC in October 2019.
Whilst the discussion paper was prepared prior to the Covid-19 outbreak, we are today making this document public. The paper contains findings and recommendations which we think will be particularly relevant as we emerge from the lockdown.
Our paper points to the dangers of using credit expansion as a means to stimulate growth and the need to:
- Develop a new over-indebtedness risk indicator which includes both debt to disposable income and debt servicing to disposable income ratios to inform financial stability policy measures and lender stress testing
- Adopt more interventionist conduct regulation including wider use of caps on the total cost of credit
- Put in place more effective debt relief programmes, including by potentially writing-down debts which have been sold by originating lenders on secondary markets.
The paper seeks an informed debate concerning these issues, based on a rigorous international comparison of the policy responses adopted.
In addition, the paper highlighted the potential negative role of credit data sharing in an economic downturn. In such circumstances, credit data sharing may act as a disincentive for borrowers to enter a debt solution and extend the ‘debt overhang’ for the economy as a whole.
Whilst the payment deferrals put in place by lenders during the lockdown have not yet impacted on credit scores (or at least are not supposed to have done so), the question arises as to whether it is justifiable for those borrowers who struggle to make payments after the deferral period comes to an end to have their credit records negatively affected for six years afterwards.