Britain’s banks may be setting aside additional funds to cover potential bad loans due to inaccuracies in the country’s labour market data.
Lenders rely on metrics like the unemployment rate, GDP, property prices, inflation, and interest rates to forecast loan defaults.
However, the UK’s Office for National Statistics has faced challenges in collecting reliable employment data, drawing sharp criticism from central bankers and politicians, according to Bloomberg.
At the end of last year, HSBC, Barclays, Lloyds, and NatWest had set aside £21.8 billion ($27.6 billion) globally to cover potential bad debts.
HSBC’s interim report earlier this year noted a risk to its projections due to “estimation and forecast uncertainty for UK unemployment,” citing ongoing updates to the UK’s Office for National Statistics methodology.
Lloyds also flagged the unemployment rate as a “key source” of credit-loss uncertainty in its latest annual report.
In October, Barclays added £102 million to its provisions, mainly due to economic uncertainties, including the pressure on customers at risk of default.
NatWest allocated £123 million to its retail banking loss provisions in its most recent quarterly release, also citing economic uncertainty.
Still, any problems within the calculations used to underpin banks’ provisions “could make them more risk averse than they need to be and so constrain their appetite to lend, thus holding back economic growth,” said Gary Greenwood, an equity research analyst at Shore Capital.
John O’Hanlon, emeritus professor of accounting at Lancaster University, stated that unreliable data is likely to lead to “increased caution on the part of banks in the measurement of their credit-loss allowances, which might cause those allowances to be higher than they would otherwise be.”
Barclays, NatWest, HSBC and Lloyds declined to comment.
While the impact on overall economic growth may be limited, the absence of reliable unemployment data remains a significant blind spot for the UK’s financial sector. Bank of England officials are struggling to assess the tightness of the labor market, making it difficult to decide how quickly to reduce interest rates without triggering inflation.
Nala Worsfold, principal for financial and risk policy at UK Finance, explained that when faced with uncertainties about official data, commercial bank staff often rely on their own judgments to adjust models accordingly.
An economist at a major UK bank, speaking anonymously, recalled an instance earlier this year when the ONS unemployment rate diverged from their forecasts. In the past, this would have prompted the bank to reassess its forecasting methods.
However, given the known issues with the ONS, the bank concluded the official data was likely inaccurate and relied on its own estimates instead.
Similarly, a senior banker at another prominent UK lender, also speaking anonymously, noted that while his team still considers the official unemployment rate, they approach the numbers with caution due to concerns over their reliability.
“The labor force. Oh dear,” BOE Governor Andrew Bailey said in a speech to the finance industry at London’s Mansion House last month. “It is a substantial problem – and not just for monetary policy – when we don’t know how many people are participating in the economy.”
