Consumer Debt Suddenly Surges in Spain, Banks Love it, But Regulators Begin to Fret

Bad habits die hard.

So it is that banks in Spain are once again beginning to significantly relax their lending standards. This includes the resurrection of the 100% mortgage, a high-risk instrument that notoriously helped fuel Spain’s madcap property boom over a decade ago. But it’s in the consumer loan market where the alarm bells are ringing loudest.

According to the Bank of Spain, in 2017 banks issued 15% more consumer credit — loans for the purchase of consumer goods like cars, furniture, electrical appliances and holidays — than the year before.

In fact, consumer credit is rising much faster than mortgage debt, according to the Bank of Spain’s latest provisional data. The total amount of consumer credit in Spain rose by 4.5% in just the month of June, from €177.8 billion in May to €186.3 billion in June, while the total stock of mortgage debt rose by a barely perceptible 0.2%, from €524.7 billion to €525.7 billion.

Lending standards are once more dropping at worrying speed. “Given the current low-rate environment, financial institutions could be looking for opportunities to increase profitability at the expense of incurring greater risk,” the Bank of Spain said. “As such, the evolution of this type of credit will have to be closely monitored in the coming quarters.”

The banks are loving it, however. The margins on mortgages, the banks’ traditional money earner, are still wafer-thin, due to two main reasons: the ECB’s stubborn refusal to raise interest rates for the Eurozone above the 0% mark; and recent legislation banning the banks from continuing to apply scandalous floor clauses, which set a minimum interest rate — typically of between 3% and 4.5% — for variable-rate mortgages in NIRP land.

By contrast, Spanish lenders are able to charge average interest of 8.15% on consumer loans — four times the average rate they charge on mortgages

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