By Jason Douglas and Wiktor Szary

LONDON--The Bank of England said Monday that it plans to review banks' lending standards following a surge in consumer borrowing, a sign that officials are increasingly wary that rising household debt could pose a risk to financial stability.

In a quarterly assessment, the BOE's Financial Policy Committee said that rapid growth in consumer credit could hurt the financial system if lax underwriting standards led to heavy losses for banks from souring loans.

The central bank said that lending standards "should be monitored closely" and that the BOE's bank-supervisory arm has launched a review to examine lenders' practices.

The move comes after data show British consumers appear to be increasingly turning to debt to finance spending amid feeble wage growth and quickening inflation. Unsecured borrowing rose at an annual rate of more than 10% in the final months of 2016, according to BOE figures.

A sharp fall in the pound since the U.K. chose to leave the European Union in June has fueled a pickup in inflation, which accelerated in February to an annual rate of 2.3%, the fastest growth in prices in more than three years. Prime Minister Theresa May has said she plans to formally notify Brussels of Britain's intention to withdraw from the bloc on Wednesday, kicking off two years of exit talks.

The BOE's Financial Policy Committee, which monitors risks to the stability of the U.K. financial system, said Monday that Britain's EU exit carries potential risks and that it is working with banks to mitigate them. It said lenders should have plans in place to cope with a variety of possible outcomes from the coming talks.

The BOE also Monday published details of its annual health-check for Britain's banks. Results are due in the fourth quarter.

This year's exam is in two parts: A short-term stress test to probe lenders' resilience to a sharp fall in sterling and house prices alongside a rise in interest rates, and a long-term scenario that will examine how banks would cope with a lengthy squeeze on profits from weak growth and mounting competition.

The FPC added that it will look at nudging up bank capital requirements later this year, after it moved in the summer to cut the so-called countercyclical capital buffer to zero following the referendum result.

Write to Jason Douglas at jason.douglas@wsj.com and Wiktor Szary at wiktor.szary@wsj.com

(END) Dow Jones Newswires

March 27, 2017 04:50 ET (08:50 GMT)

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