British banks must continue to provide loans during the coronavirus pandemic to ensure that previously viable companies do not fail due to the crisis, the government and Bank of England said.
In a joint letter to the chief executives of major banks, Chancellor Rishi Sunak, Bank of England governor Andrew Bailey and the interim chief executive of the Financial Conduct Authority, Chris Woolard, urged lenders to support the economy “despite uncertain economic conditions”.
The trio said banks and other lenders must “take all actions necessary” to ensure the benefits of government credit measures are “passed through to businesses and consumers”.
“This will require a willingness to maintain and extend lending despite uncertain economic conditions,” the letter said.
“We must ensure that all firms whose business models were viable before this crisis remain viable once it is over,” the letter said, including businesses not covered by government lending schemes.
The government and Bank of England have introduced a host of emergency measures to support businesses and individuals as the coronavirus pandemic batters the UK economy.
These include a £330bn loan guarantee scheme to help small and medium-sized businesses borrow up to £5m, and a corporate financing scheme to buy up commercial debt.
Regulators have also taken steps to reduce pressure on lenders during the crisis, including reducing the countercyclical capital buffer to zero per cent and delaying the implementation of new capital rules.
The trio said they recognised the “huge efforts” banks are making to deliver the new credit programmes at a difficult time, but added: “we cannot stop there”.
“The next phase of our work will be critical in getting the support where it is most needed.”
Stephen Jones, chief executive of industry body UK Finance, said banks were “working closely with the government and regulators to deliver the support and flexibility businesses and consumers need during this challenging time”.
“The industry is committed to supporting the economy through this temporary shock to the fullest extent, and has the capacity to assist viable businesses with their cashflow and investment needs,” he continued. “Lenders are working hard to provide the required funding to these firms as soon as possible.”
John Cronin, a banking analyst at Goodbody, said the letter represented “a strong message to the banks to lend – in exchange for the massive support that government has extended to the sector.”
“That said, I don’t read it as a threat either but that would be the next step,” he added.
The letter comes as the European banking and markets watchdogs said lenders have the flexibility to avoid a huge rise in provisioning for non-payment of loans during the pandemic.
Banks have warned they face mounting provisions as businesses and households they lent money to struggle to repay loans during the outbreak.
While some EU countries have approved measures to ease the burden on businesses, such as repayment holidays, banks were unsure whether a payment holiday would technically constitute a failure to pay.
This would trigger increased provisioning as required under the IFRS 9 accounting rule, and higher provisioning would eat into lenders’ capital.
“In ESMA’s view, the principles-based nature of IFRS 9 includes sufficient flexibility to faithfully reflect the specific circumstances of the COVID-19 outbreak and the associated public policy measures,” the European Securities and Markets Authority said in a statement.
The European Banking Authority (EBA) also sought to reassure lenders today.
“The EBA calls for flexibility and pragmatism in the application of the prudential framework and clarifies that, in case of debt moratoria, there is no automatic classification in default, forborne, or IFRS9 status,” the regulator said in a separate statement.