In the last fortnight, Barclays, HSBC, Santander, NatWest and Lloyds have all unveiled worrying results. The five banks announced multi-billion pound impairments related to potential loan losses arising from the Covid-19 virus. S&P Global Ratings has estimated that systemwide UK domestic credit losses will rise to £18.5 billion in 2020.
The Government relied upon the banks to channel funds to business in need of cash over the crisis shoring up short-term liquidity. The banks have now lent almost £50bn through the Government’s various schemes. With the State guaranteeing 80-100% of these loans, the banks have arguably acted more like administrators rather than conventional lenders. Earlier in the year, at the height of the crisis, the Business Secretary pointedly lent on the banks saying, “Just as the taxpayer stepped in to help the banks back in 2008, we will work with the banks to do everything they can to repay that favour and support the businesses and people of the UK in their time of need”.
At the outset of the crisis, the Bank of England sensibly reduced the amount of capital that the banks needed to set against their lending. The Central bank also encouraged lenders to suspend dividends and bonusses to senior staff. Even with these measures in force, it seems that the stability of the UK’s banks remains in question in light of these recent results.
Under the terms of the Government guaranteed loan schemes, lenders need to first attempt to get money back from defaulted borrowers before they can call on the guarantee. The banks have also cautioned that their ability to hire restructuring and collection specialists has been severely constrained given the tens of billions in loan-loss provisions piling up.
These loans were never commercial and were extended to guarantee liquidity in an emergency – as the Business Secretary put it “there was a desire to get money out of the door as quickly as possible”. The Office for Budget Responsibility expects the Government to lose £3 for every £5 lent under the Bounce Back scheme in its worst-case scenario.
HM Treasury is now reported to be in discussions with the banks about how to tackle this bad debt. Part of the discussion focusses on a common code of conduct to deal with bounce-back borrowers, which could include guidance on when and how to extend terms automatically. One option reported to be on the table is whether bad loans could be extended for as long as a decade. This option has been resisted by the banks wary of increasing their risk.
The IoD has proposed that borrowers should be able to convert government-backed loans into 'student loans', with repayments kicking in once the business has turned a profit. Under such a model, companies would pay a percentage of what they earn over a certain time period, in a manner similar to student loans. We believe this could give small businesses more breathing space to invest and grow as they make repayments while potentially lowering the risk of loan defaults and removing these loans from bank balance sheets.
If we don’t deal with the debt mountain businesses have had to take on because of coronavirus, the economy will take much longer to heal and we put the banks at risk. The Chancellor is reported to concerned that if he gives any hint that the government will propose more generous repayment terms for the loans — or consider writing them off as grants — it is likely to lead to even more loans being opportunistically taken out. This may be a legitimate concern for the time being, but to manage the very real danger that a crushing debt burden will handicap any private sector recovery he may ultimately need to adopt a bolder and more creative approach in the months ahead.
Carum Basra is the IoD's Corporate Governance Policy Adviser