Major British banks are increasing their reserves for bad loans, driven by uncertainty surrounding the UK’s flawed labour market data.
The Office for National Statistics (ONS) has faced sharp criticism from central bankers and politicians for its struggles to collect reliable employment figures, leaving lenders to grapple with forecasting challenges.
Banks rely heavily on the unemployment rate, alongside other key metrics such as GDP, property prices, inflation, and interest rates, to gauge the likelihood of loan defaults.
However, inaccuracies in ONS data have complicated these projections. As of the end of last year, HSBC, Barclays, Lloyds, and NatWest had collectively earmarked £21.8 billion globally to cover potential loan losses.
HSBC, in its interim report earlier this year, flagged the risk of “estimation and forecast uncertainty” tied to ONS updates on UK unemployment.
Similarly, Lloyds identified unemployment as a “key source” of credit-loss unpredictability in its latest annual report. Barclays added £102 million to its loss provisions in October, citing broader economic risks.
Meanwhile, NatWest bolstered its retail banking loss provisions by £123 million, also attributing the move to economic uncertainty. Although not directly linked to labour market data, these adjustments reflect banks’ cautious stance amid a turbulent economic landscape.
Gary Greenwood, an equity research analyst at Shore Capital, warned that flawed data could prompt banks to adopt overly conservative lending strategies, potentially stifling economic growth.
“They could become more risk-averse than necessary, limiting their appetite to lend,” he said.
John O’Hanlon, emeritus professor of accounting at Lancaster University, echoed this sentiment, suggesting that unreliable data may lead banks to overestimate credit-loss allowances, further dampening lending.
The implications for the wider economy, however, remain modest. Nonetheless, the absence of accurate unemployment data poses a significant challenge for the UK’s financial sector.
Bank of England (BoE) officials are finding it increasingly difficult to gauge the labour market’s tightness, complicating crucial decisions on interest rate adjustments and inflation control.
Faced with data uncertainties, many banks are relying on internal models and judgment to navigate the situation.
Nala Worsfold, principal for financial and risk policy at UK Finance, noted that commercial bank staff frequently override official figures when discrepancies arise.
One unnamed economist from a leading UK bank highlighted an instance where ONS unemployment data contradicted internal forecasts. Rather than adjusting their models, the bank dismissed the official figures as erroneous.
BoE Governor Andrew Bailey underscored the gravity of the issue during a recent speech at London’s Mansion House.
“The labour force. Oh dear,” he remarked. “It is a substantial problem—not just for monetary policy—when we don’t know how many people are participating in the economy.”
As the financial sector contends with data reliability issues, the ripple effects on lending and economic growth remain under close scrutiny.
