All borrowers want to consider carefully their ability to make the payments they’re signing up to, but no individual can be expected to take into account the spillover effect of their debt on the wider economy. After all, no individual will really make a difference. These spillover effects are – in the language of economists – an ‘externality’. So lenders are the first line of defence against the wider economic risks of high debt levels. An enlightened lender should factor in the risks of losses on the rest of their business from high levels of mortgage debt. And they should factor in the risks of losses from the consumer credit they’ve extended. The emphasis there was on ‘should’. Because in reality, the opposite can happen; lenders can enter a spiral of complacency. It begins with a period of good economic performance and low loan losses. 6  All speeches are available online at www.bankofengland.co.uk/speeches  6  Lenders extrapolate that into the future, attributing success to skill rather than chance. 4  Nowhere is this clearer than page 8 of the 2006 Annual Report of Northern Rock: “The credit quality of our assets remains strong…The reason for this improvement is … because we have further improved our credit scoring …Our scorecards are highly predictive…which gives an early warning of potential default - so we are confident that the current historically low level of default will continue.”  Within three years, the arrears rate on its mortgage book had increased ten-fold.
Source: Bank of England 2017 Q2 Credit Conditions Survey (CCS). (a) A positive balance indicates that the changes in the factors described have served to increase credit availability. (b) Question: ‘How have the following factors affected overall secured credit availability to households over the latest three months relative to the previous three months?’ The chart shows responses to the option 'market share objectives'. (c) Net percentage balances are calculated by weighting together the responses of those lenders who answered the question by their market shares. Chart 17. Proportion of new mortgages with (a) no fees  Chart 18. Loan to income distribution of new (a) mortgage lending  Per cent  Proportion of £ fee new mortgages  50 45 40 35  30 25 20 15 10 5 0 2011  12  13  14  15  16  17  Sources: Moneyfacts and Bank calculations. (a) The proportion of £ fee products in each year is calculated relative to the total number of new mortgages offered during the year. The proportion in 2017 is calculated based on data from January to April 2017. Sources: FCA Product Sales Database and Bank calculations. (a) The Product Sales Database includes regulated mortgages only. 21  All speeches are available online at www.bankofengland.co.uk/speeches  21  Chart 19. Major UK banks’ capital ratios  Chart 20.