‘Lenders mustn’t hoard cash as government support ends’
THE Bank of England has warned lenders not to hang on to capital and instead protect the recovery by supporting businesses and consumers.
The Bank’s Financial Policy Committee said the UK’s “resilient” financial system has helped households and companies to weather the economic disruption caused by the pandemic.
However, it says banks must carry on supporting people and businesses to keep the recovery on track.
The FPC’s latest report said: “Households and businesses are likely to need continuing support from the financial system as the economy recovers and the Government’s support measures unwind over the coming months.
“It is in banks’ collective interest to continue to support viable, productive businesses, rather than seek to defend capital ratios by cutting lending, which could have an adverse effect on the economy and, consequently, on banks’ capital ratios.”
The FPC, chaired by Bank governor Andrew Bailey, added that as lenders are capable of surviving further economic shocks unscathed, the Bank of England has immediately rescinded its ban on banks paying dividends to shareholders. The regulator stopped banks paying dividends at the start of the pandemic.
The FPC said that although the number of households with a high debt burden has increased during the pandemic, it is “significantly below its preglobal financial crisis level”.
At the same time, while debt loads have increased among small businesses, interest payments are around historic lows.
However, one area of concern is big companies borrowing in the bond market at high rates not seen for a decade.
“This could increase potential losses in a future stress, and highly leveraged firms have also been shown to amplify downturns in the real economy,” the FPC said.
Another area of risk is City firms moving systems into the cloud so they can access them anywhere.
As the market is dominated by Amazon and Microsoft, the FPC worries over a lack of competition. It said the “reliance on a small number of cloud service providers and other critical third parties could increase financial stability risk”.