UK banks are bracing for a potential surge in unpaid debts as cash reserves at UK households plummet to their lowest levels in three years.

The country’s top lenders are expected to provision a combined £4bn for loan-losses in 2027, according to an analyst consensus, but this risks coming up short as households are squeezed by the cost-of-living.

Lento Tanq, senior analyst at Bloomberg Intelligence, said provisions would likely climb higher as consumers turn to unsecured borrowing like credit cards, personal loans, and overdrafts to cover their living costs. 

Tanq said there was a “shortened path” for when Brits go from losing their job to falling behind on bills due to “mounting financial pressure”.

“The acceleration of change suggests households’ financial position has been squeezed further over the past year, despite fewer declaring outright financial difficulty,” he added.

Brits have battled rising bills following the conflict in the Middle East, which has sent energy bills soaring. Household energy costs are expected to rise at the sharpest level in four years in January with a £276 jump, according to figures from consultancy Cornwall Insight

Some 55 per cent of households can now survive no more than three months after a job loss, a three-year record, according to research from Bloomberg Intelligence. 

Barclays face deepest exposure

“Thinner household buffers could lift unsecured credit losses” at top banks, Tanq said.

Banks make provisions for bad loans each quarter, which reflect the money set aside on their balance sheets to absorb expected future losses when borrowers fail to repay their debts.

“Households are already using credit and savings to absorb living-cost pressure, raising a more immediate warning for unsecured lenders,” Tanq said.

Barclays is tipped to face the most exposure due to its dominance in the credit market and personal-loan books.

The bank expanded its UK credit card exposure in the first half of the year to £17.5bn, up from £17.2bn at the end of 2025. Meanwhile personal loans in the UK grew to £8.9bn from £8.5bn. Barclays declined to comment.

UK lenders have already moved to hike loan provisions following the conflict in the Middle East. Barclays set aside £823m for potential loan losses in the first quarter of the year after the US-Iran war broke out.

Other banks have also lifted their bad loan provisions in recent months. HSBC increased its forecast for loan losses in 2026 to 45 basis points, meaning the bank was bracing for $4.50 of every $1,000 it has lent out to go unpaid. This was attributed to “ongoing uncertainty in the outlook”.

While unsecured borrowing shows strain, Tanq said mortgage “loss severity should remain lower, while house-price growth is positive and borrower equity is intact”.

He added it would bode well for Lloyds, which holds the largest overall mortgage book in the UK, and Santander UK, whose loan book is skewed towards residential mortgages following its takeover of TSB.