The Bank of England has urged banks to continue lending through the recovery as the government starts to wind down its coronavirus loan schemes.
While the vaccine rollout has boosted confidence the Financial Policy Committee (FPC), which looks at the risks facing the system, has warned SMEs will need to finance cash-flow deficits this year and banks must continue to provide support.
“It is in banks’ own interest to continue to support the economy by lending to viable, productive businesses…” the FPC said. “Banks have high levels of capital. This would allow them to absorb very big losses while continuing to lend.”
The government is set to close its emergency lending schemes to new applications at the end of this month.
The central bank said it did not expect to raise counter cyclical buffer rates until 2022, meaning banks could have access to more capital to lend.
The FPC concluded that the banking system has “the capacity to continue to provide that support, even if economic outcomes are considerably worse than currently expected.”
There have been concerns that a number of businesses will be unable to pay back both commercial and the government-backed loans as they emerge from the pandemic. In anticipation some high street banks have extended provisions for bad loans over the past few months.
“If these businesses are not able to meet their financing needs, this could deepen the economic stress and trigger losses for banks on their loans,” the committee warned.
Elsewhere the bank said it was continuing to review rules around open-ended funds. The funds offer daily redemptions which came under scrutiny after the collapse of Woodford Investment Management and several property funds were forced to suspend withdrawals due to Brexit and the pandemic.
The FPC added it will “continue to promote an open and resilient financial system” as the UK works through its post-Brexit equivalence deal on financial services.