British lenders need to hold around an extra £10 billion pounds in capital to guard against increased risks from rapidly rising unsecured consumer lending, the Bank of England said today.

British consumer borrowing is growing at nearly 10% a year, far faster than incomes, and the Bank's Financial Policy Committee said it would tell banks by the end of the year how much extra capital to hold, based on the riskiness of their lending.

Policymakers also warned that Britain's upcoming departure from the European Union in March 2019 posed big legal problems for about a quarter of derivative contracts, which businesses use to hedge against interest rate and currency risks.

Financial firms would need to redraft cross-border contracts to avoid disruption to markets, though a better solution would be for British and EU legislators to pass a law to allow existing contracts to run their course, the Bank said.

On consumer credit, the central bank said that in a crisis situation - with unemployment more than doubling and the Bank's interest rate spiking to 4% - British lenders should expect to write off 20% of their loans.

[Lenders] have been underestimating the losses they could incur in a downturn

This compares with 13% last year, when banks' loan quality was higher and the Bank tested it against a lower interest rate scenario.

The extra £10 billion is small in the context of the £280 billion of core capital held by British lenders, but the Bank said it expected banks to take the greater risks into account in their future lending plans.

"Lenders overall are placing too much weight on the recent performance of consumer lending in benign conditions as an indicator of underlying credit quality. As a result, they have been underestimating the losses they could incur in a downturn," the Bank said in a statement.

British households have been squeezed by a sharp pick-up in inflation since the start of the year, which has eroded households' incomes, and the Bank expects inflation to reach its highest in more than five years next month.

In March the Bank said it was concerned that increased competition among lenders was leading to potential risks from things like longer interest-free periods on new credit cards and bigger unsecured personal loans.