London Briefing: Lloyds TSB has lent British households around £70 billion (€100.8 billion) in the form of mortgages. A prudent person might think that some of that money might never be repaid.

Whatever the state of the economy in general, or the housing market in particular, there will always be a few poor souls who get into financial difficulties and fail to honour their debts.

In a cyclical downturn, particularly one accompanied by a slump in property prices, the number of people who cannot service their mortgages will, of course, rise quite sharply.

If falls in house prices lead to negative equity - where the mortgage exceeds the value of the property - we have a potentially serious economic problem, something that we last saw at the beginning of the 1990s.

UK banks such as Lloyds argue that there isn't too much to worry about, from their perspective at least, since they now manage their mortgage lending much more efficiently than in the past; the risk profile of mortgage "books" is much lower than a decade ago.

By this, they mean that they no longer lend people vast multiples of salaries and that the bulk of mortgages are lent at low loan-to-value (LTV) ratios. One hundred per cent mortgages? Not the British banks, at least according to their published accounts.

Low LTV ratios are critical in deciding what is likely to happen to banks' balance sheets in the event of a serious bad-debt problem emerging from the ongoing property slump. If, for example, the average defaulter owes 60 per cent of the value of his house, prices can fall by up to 40 per cent before the bank has a problem.

The bank simply repossesses the house and sells it on to recover the bad debt. This may be a tragic event for the individuals involved but of no consequence to the bank's balance sheet or shareholders, provided house prices don't fall by too much.

All things considered, we might forgive the bank for thinking that it doesn't have to worry too much about bad debts. But custom and practice in banking means that plans of some sort have to be made: the bank has to take a "provision" each year for what it considers to be the likely level of bad and doubtful debts in the years ahead.

There are always bad debts and, by taking a small hit each year, the bank removes the probability of a large nasty surprise in the years ahead. Given the history of banking - nasty debt surprises have an annoying habit of occurring more frequently than shareholders would like - it is regarded as prudent to take such provisions.

If the bad debts don't materialise, the prior provisions can be written back to the profit-and-loss account.

What is a prudent provision level for Lloyds' £70 billion? A 10 per cent (£7 billion) allowance for likely bad debts would be aggressively over-cautious. One per cent, or £700 million, might be thought more appropriate: the provisioning game is more art than science, and is partly based on bad-debt levels over the past.

The trouble is, the banks (as opposed to building societies) don't have any history of bad mortgage debts - they only got into this business in any serious way after the last housing crash.

Previous banking problems arose through lending to companies, not households.

So Lloyds has to take a guess. And the figure for likely bad debts for the whole of its £70 billion mortgage portfolio is £7 million.

Yes, £7 million. The bank thinks it is going to get virtually every single penny of its money back - the £7 million is probably an allowance for the costs of repossessing those few homes that actually have defaulted mortgages attached to them.

Lloyds undoubtedly think that this level of provisioning is prudent, based on what it knows about the credit profile of its customers. It may well be the case that Lloyds' mortgage book has an extremely low LTV ratio, and/or that few of its customers are likely to get into difficulties.

But some of the more aggressive mortgage lenders have been giving out cash on very high multiples of income.

We even have the new concept of the "self-certified" mortgage, where the borrower swears that he really does earn the salary on the application form, even if he is unable to provide documentary evidence to prove it. This system is intended for the self-employed, but I know of several PAYE workers with self-certified mortgages that were obtained at unbelievable income multiples.

I wonder what the Bank of England thinks about all of this.