October 20, 2014
Wealth gap poses growing risk to financial system
Toronto, ON--The widening wealth gap is a concern to more than six in ten bank risk professionals, according to the latest quarterly survey of North American bank risk managers conducted for FICO, a predictive analytics and decision management software company. In the survey, 62 per cent of respondents agreed that "the wealth gap poses a growing risk to the financial system in North America."
"The economy in North America is driven largely by broad-based consumer activity, so it makes sense that the concentration of wealth would raise flags among bank risk managers," said Dr. Andrew Jennings, FICO's chief analytics officer and head of FICO Labs. "This concern was echoed on a global scale by Credit Suisse in a recent report that found many indicators of wealth inequality are reaching levels that could result in social or political instability."
Are we becoming desensitized to risk of student loan defaults?
For the first time in four years, a large majority (59 per cent) of respondents expected student loan delinquencies to level off or decrease over the next six months. With only 41 per cent of respondents expecting delinquencies to increase, this is the least pessimistic sentiment regarding student loans in the survey's history.
"This sentiment can be interpreted in a couple of ways," says Mike Gordon, FICO's executive vice-president of sales, services and marketing. "Some lenders may simply feel things can't get any worse, even if the outlook isn't rosy. But others may believe the economy has finally recovered to a point that will allow more people to stay current on their student loans. It will be interesting to see if this quarter's sentiment proves to be an aberration or the start of a new trend."
The survey, conducted for FICO by the Professional Risk Managers' International Association (PRMIA), also asked bankers about risks to consumer credit health. The most common concern among bankers surveyed was "under-employment and/or unemployment" (41 per cent) while 22 per cent cited "increasing consumer indebtedness." The third and fourth most common concerns were "a sudden shock to the financial system" (16 per cent) and "rising interest rates" (12 per cent). Eight per cent of those surveyed said a "weakening of the housing market" was the biggest risk to consumer credit health.
"Similar to the overall findings, just over one-third of Canadian respondents believe the biggest threat to consumer credit health is 'under-employment and/or unemployment'," said Kevin Deveau, managing director, FICO Canada. "This points to continued concern amongst Canadian bankers about security of jobs and the overall health of the economy in Canada. Unemployment levels have held steady around seven per cent over the past couple of years, remaining stubbornly above pre-recession levels."
Outlook positive for small business lending
Continuing a recent trend, survey respondents throughout the U.S. and Canada were optimistic about small business lending. Among those polled, 42 per cent expected the amount of credit extended to small businesses to increase over the next six months, while nine per cent expected that amount to decrease. In addition, 39 per cent expected the approval rate for small business loans to increase, with 15 per cent expecting the approval rate to decrease.
In the survey, 27 per cent of respondents said they were concerned that the supply of credit for small businesses would fail to meet demand over the next six months. That is nearly unchanged from last quarter (28 per cent) and a marked improvement from the 40 per cent of respondents who believed supply would fall short of demand in Q1 2014.
A detailed report of FICO's quarterly survey is available here. The survey included responses from 149 risk managers at banks throughout the U.S. and Canada in September 2014. FICO and PRMIA express special thanks to Columbia Business School's Center for Decision Sciences for its assistance in analyzing the survey results.