A sharp, unexpected surge in default rates on unsecured consumer loans (such as credit cards and personal loans) could trigger a systemic solvency crisis in the retail banking sector.
This outcome is most likely to occur if, following the increase in defaults, major commercial banks:
maintain a high proportion of liquid assets, such as reserves held at the central bank.
have a low ratio of capital to their total assets, leaving them with thin equity buffers.
rely predominantly on stable, long-term retail deposits rather than volatile wholesale funding.
are subject to strict ring-fencing regulations that separate retail banking from investment banking.
