Banks urged to keep approving state-backed coronavirus loans

Bank of England governor Andrew Bailey has put pressure on banks to ramp up lending amid fears firms are facing a £140billion cash flow crisis.

Britain’s biggest lenders have come under fire for failing to approve enough of the Government-backed Coronavirus Business Interruption Loans, launched by Chancellor Rishi Sunak more than a month ago.

With the UK facing its deepest recession for over 300 years, the Bank of England stressed how vital it is for the economy – as well as their own finances – that banks provide these lifelines to struggling businesses.

In a hard hitting report, the central bank predicted the economy would shrink by 30 per cent in the first half of the year and 14 per cent during the year as a whole.

This would amount to the worst recession since the ‘Great Frost’ in 1709. But it also suggested the economy could bounce back by 15 per cent next year, with ‘relatively limited’ long-term damage. Much of this, it said, hinges on banks’ behaviour.

As the Office for National Statistics suggested almost a quarter (23 per cent) of firms had temporarily stopped trading during the lockdown, the Bank warned that firms could be facing a £140billion ‘cash flow deficit’.

Bailey said failure to lend would trigger a vicious circle of more bankruptcies, resulting in bigger losses for banks as more loans turn sour.

He said: ‘The better path for banks is to keep lending. We keep banging this message home.’ The urgency of the situation was spelled out in the Bank’s Financial Stability Report, which said:

‘Continued lending by the banking system, supported by government schemes, is essential to minimise long-term damage.

‘If banks were to withdraw from credit provision, more businesses would fail due to cash flow deficits, triggering bigger losses for banks on their existing corporate loans, and, by pushing unemployment higher, bigger losses on household loans too.

‘It is in the collective interest of the banking system to continue to support businesses and households though this period.’

The Bank said lenders would face £80billion in losses from bad loans to firms and households if the economy shrank by almost a third in the second quarter.

But new ‘desktop stress tests’ carried out by its officials have established the big lenders would have more than enough capital to absorb this.

The report said the longer consequences for banks and for the wider economy would be far worse if they decided to protect themselves by reining in lending – as they did after the last financial crisis more than a decade ago.

It also pointed out curbing lending would provide ‘minimal benefit’ in the short term as lenders are protected from the majority of losses under the CBILs scheme, which is 80 per cent guaranteed by the Government.

The new Bounce Back loans launched on Monday are fully underwritten by the Government. Barclays revealed it had already approved more than 50,000 of the Bounce Back loans, worth £1.5billion.