Bank of England tells lenders to ‘get on with’ Covid-19 business loans
The Bank of England governor, Andrew Bailey, has told Britain’s high street lenders that they must “put their backs into” providing loans for companies affected by Covid-19 amid evidence that many will fail without urgent help.
Bailey said commercial banks were under no illusion that “they had to get on with this” to prevent long-term scarring of the economy as a result of the pandemic.
The governor said he saw nothing implausible about the projection from the Office for Budget Responsibility of a 35% contraction of the UK economy in the second quarter of 2020, but said keeping businesses afloat would be crucial to the speed of the UK’s recovery.
Figures released earlier this week showed that only £1.1bn of loans had been granted to small firms in the UK under the coronavirus business interruption loan scheme (CBILS), despite the Treasury pledging to underwrite 80% of the cost if the money was not repaid.
Speaking at a virtual press conference, Bailey said banks were operating under difficult conditions but added: “Notwithstanding the stress they are under, they have got to put their backs into it and get on with this. They have to get on and process this stuff because livelihoods are at stake.”
Bailey said one way of speeding up the process would be for the government to underwrite 100% of the loans, which are interest-free for 12 months, but insisted this was a matter for the chancellor, Rishi Sunak, to decide.
“The chancellor needs to make that decision because the public purse is at risk,” Bailey said.
Very small firms made up a high proportion of the loan applications and the question was whether the system would be unblocked if the Treasury took all the risk. UK Finance, the bank industry lobby group, said this week that 21% of the 28,460 formal CBILS applications had so far been approved. However, more than 300,000 firms have reportedly made informal inquiries about seeking help from the scheme, which is part of the government’s wider business support package worth £330bn.
Figures from the US suggest that American banks have been much quicker than those in the UK to provide loans to small companies to help them through the lockdown. Bailey said he was not acquainted with the US system, but said: “This is an issue that has to be tackled.”
The Bank is currently working on its forecasts for the economy ahead of the publication of its next quarterly monetary policy report in early May – the first since the spread of Covid-19 to the UK closed down large parts of the economy.
Bailey said that on the basis of the evidence from credit card use, business surveys, the housing market and claims for universal credit the OBR’s projections of a 35% slump did not seem excessive. “There is nothing implausible about a number of that size,” he said.
The governor was cautious, however, about the OBR’s assumption that activity would return to its pre-Covid-19 levels by the end of the year. Bailey said that would depend on the level of business failures and whether the government’s furlough scheme led to much higher unemployment.
The International Monetary Fund said earlier this week that global financial stability could be put at risk by the deepest recession since the 1930s, but Bailey said the UK’s financial system was robust enough to withstand the pressure. The Bank’s stress tests had not factored in Sunak’s decision to support the economy through higher public spending, wage subsidies and loan guarantees.
Bailey said the government was having no trouble raising the money from the financial markets to cover its sharply increased borrowing, adding that Sunak had yet to draw on a government overdraft facility at the Bank of England, which was announced last week.
But he made clear that the Bank was keeping a close eye on the longterm implications of the additional debt being accumulated by the government, businesses and households. “We have to watch that very carefully,” Bailey said.