The Bank of England, through the Prudential Regulation Authority, has warned that some lenders could be hit by sudden losses if customers on zero percent interest credit card offers leave earlier or borrow less than expected, the Financial Times reported, citing a letter by the regulator to bank chiefs.
Melanie Beaman, PRA director for U.K. deposit takers, said in the letter that lenders relying heavily on so-called "effective interest rate" accounting should potentially earmark additional capital to mitigate risks, according to the June 15 report. The accounting method allows banks that offer products with temporary interest-free periods to book in advance some of the revenues they expect to gain at the end of the introductory period, the report added.
Although the letter did not mention Virgin Money Holdings (UK) PLC, the FT said analysts widely consider the bank to be the most exposed as it rapidly expanded its credit card business in recent years. Around 20% of the bank's 2017 net interest income came from the effective interest rate method, it added.
However, Virgin Money CEO Jayne-Anne Gadhia reportedly said in May that the bank was "seeing good performance" from the first 4,000 clients to come off their promotional periods. The bank has agreed to a takeover offer by CYBG PLC.