Liberal Democrat shadow chancellor Vince Cable has called on British banks and money lending institutions to set fresh guidelines for acceptable levels of debt.
Speaking at the British Bankers' Association annual responsible lending conference, Cable urged the banking industry not to be complacent about rising levels of consumer debt.
He says: “It cannot be avoided the fact that by this summer individuals are collectively going to be more than £1tn in debt and the relationship between debt and income is higher than it has ever been historically. Each month lending is increasing by around £10bn of which a large proportion is unsecured lending.
“This is an issue which needs urgent attention, with interest rates predicted to rise by over 1% in the next year we need to decide what level of debt is sustainable or many will find themselves unable to sustain their debts as the costs of repayments rise.
“There is currently no definition for over-indebtedness, and this is something we require. If we can have a definition of over-indebtedness for entire countries or for the government, why can we not do the same for individuals?
“Seeing a crash in the market is neither desirable for individual customers, nor the lending institutions. It is therefore in all our interests to manage levels of debt – individually and collectively – in a more sustainable way.
“Far better for the banking industry to work together and cut back on excessive loan to earnings ratios, taking into account customers' existing levels of indebtedness, than continue at current unsustainable levels.
“Sharp fluctuations in the economy – in whatever sector, whether up or down – cause instability and uncertainty. If up, speculatory activity distorts the market, as we have seen with house prices. If down, then banks as well as their customers lose out as overall consumer confidence falls away.
“Thankfully we are not at crisis levels yet, and there is still time to act. But, if incomes stagnate, if unemployment rises, if interest rates go up, precautionary action now will save a great deal of pain later.
“It is time the banking industry took sensible precautions to take account of wider economic indicators, rather than simply taking a gamble while wearing rose-tinted spectacles.”