Britain’s job data crisis poses rising challenge for banks

• Published On: 01 December 2024 at 19:45

British banks may be setting aside additional capital to cover potential bad loans caused by mistakes in the country's labour market data.

Lenders use data such as the unemployment rate, GDP, property prices, inflation, and interest rates to forecast loan defaults.

However, the UK's Office for National Statistics has struggled to collect trustworthy job data, bringing severe criticism from central bankers and lawmakers, according to Bloomberg.

At the end of last year, HSBC, Barclays, Lloyds, and NatWest had set aside £21.8 billion ($27.6 billion) worldwide to cover potential bad debts.

HSBC's interim report earlier this year warned of a risk to its estimates due to "estimation and forecast uncertainty for UK unemployment," noting ongoing revisions to the Office for National Statistics methodology.

Lloyds identified the unemployment rate as a "key source" of credit-loss concern in its most recent annual report.

In October, Barclays increased its provisions by £102 million, owing to economic concerns, particularly pressure on customers at risk of default.

NatWest included £123 million in retail banking loss reserves in its most recent quarterly report, citing economic uncertainties.

However, any flaws in the calculations used to support banks' provisions "could make them more risk averse than they need to be and thus constrain their appetite to lend, thus holding back economic growth," said Gary Greenwood, an equity research analyst at Shore Capital.

According to John O'Hanlon, an emeritus professor of accounting at Lancaster University, incorrect data will likely 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 development may be limited, the lack of trustworthy unemployment data remains a key gap in the UK's finance industry. Officials at the Bank of England are trying to estimate the labor market's tightness, making it harder to determine how rapidly interest rates could be reduced without igniting inflation.

Nala Worsfold, principal for financial and risk policy at UK Finance, noted that when faced with uncertainty about official data, commercial bank employees frequently rely on their own judgment to alter models accordingly.

An anonymous economist at a big UK bank remembers an event earlier this year in which the ONS unemployment figure deviated from their expectations. In the past, this would have caused the bank to reconsider its forecasting methodology.

However, given the acknowledged difficulties with the ONS, the bank judged that the official data was most likely incorrect and relied on its own estimations instead.

Similarly, a senior banker at another big UK lender, speaking anonymously, stated that while his team still evaluates the official unemployment rate, they do so with caution due to worries about its trustworthiness.

"The labour force. "Oh no," BOE Governor Andrew Bailey remarked in an address 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."