available online at www. bankofengland. co. uk / speeches lenders extrapolate that into the future, attributing success to skill rather than chance. nowhere is this clearer than page 8 of the 2006 annual report of northern rock : “ the credit quality of our assets remains strong … the reason for this improvement is … because we have further improved our credit scoring … our scorecards are highly predictive … which gives an early warning of potential default - so we are confident that the current historically low level of default will continue. ” within three years, the arrears rate on its mortgage book had increased ten - fold. it is this complacency that prompts lenders to make credit cheaper. they think they need less compensation for risk. interest rates on their loans come down and terms become looser. as it becomes cheaper, credit is taken up more widely. as mortgage debt expands, house prices rise. lenders think borrowers have more valuable houses against which to secure mortgages. and as terms and conditions ease up, it becomes easier to service debts. more borrowers get access to consumer debt and make their repayments. credit scores improve. lenders then think they ’ ve really cracked it. what governor carney has described as the four most expensive words in the english language start to be heard : “ this time is different ”. the spiral continues and borrowers rack up more and more debt. lending standards can go quickly from responsible to reckless. the sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing. so the safety of the economy needs a further defence line beyond the lenders ; a defence line that guards against this spiral of complacency, and that takes account of the full, collective effect of individual decisions on the wider economy. that line is regulation – a defence line that was, frankly, missing in action in the run - up to the financial crisis. this is a form of the ‘ optimism bias ’ documented by daniel kahneman. kahneman, d ( 2012 ) ‘ thinking, fast and slow ’ penguin see carney ( 2015 ) ‘ three truths for finance ’, remarks given at the harvard club uk southwark cathedral dinner, london. http : / / www. bankofengland. co. uk / publications / pages / speeches / 2015 / 843. aspx all speeches are available online at www.

percentage point change in consumption to income ratio nominal gdp growth rate - 5 - 10 - 15 - 20 - 25 - 5 0 to 1 1 to 2 2 to 3 3 to 4 ≥4 mortgage lti ratio sources : bank of england, office for national statistics and bank calculations. ( a ) twelve - month growth rate of nominal credit. credit is defined here as debt claims on the uk private non - financial sector. this includes all liabilities of the household and notfor - profit sector and private non - financial corporations ’ ( pnfcs ) loans and debt securities excluding derivatives, direct investment loans and loans secured on dwellings. ( b ) sterling m4 lending by uk mfis to the household sector and pnfcs. data cover loans and mfis ’ holdings of securities. seasonally adjusted. sources : living costs and food ( lcf ) survey, ons and bank calculations. ( a ) change in average non - housing consumption as a share of average post - tax income ( net of mortgage interest payments ) among households in each mortgage lti category between 2007 and 2009. ( b ) lcf survey data scaled to match national accounts ( excluding imputed rental income, income received by pension funds on behalf of households and fisim ). lti ratio is calculated using secured debt only as a proportion of gross income. ( c ) repeat cross - section methodology used, with no controls for other factors, or how households may have moved between lti categories between 2007 and 2009. chart 3. uk banks ’ sterling write - offs on ( a ) lending to individuals chart 4. household debt to income ratio and ( a ) consumption growth over 2007 - 12 adjusted consumption growth 2007 - 12, per cent - 2 - 4 - 6 united kingdom - 8 - 10 sources : bank of england and bank calculations. ( a ) write - offs of sterling lending by uk mfis to uk individuals. write - offs are net of recoveries. non seasonally adjusted. ( b ) consumer credit consists of credit card lending and other unsecured lending ( other loans and advances ) and excludes student loans. ( c ) lending secured on dwellings. household debt to income in 2007, per cent sources : floden ( 2014 ) and oecd national accounts. ( a ) change in consumption is adjusted for the pre - crisis change in total debt, the level of total debt and the current account balance. see floden, m. ( 2014 ),