The financial sector can be “part of the solution” to the issues raised by coronavirus—in contrast to the 2008 financial crisis—according to the previous governor of the Bank of England, Mark Carney. This blog considers:
- policy announcements in relation to the banks by the Bank of England, the Government, and the Financial Conduct Authority;
- actions taken by the banks themselves; and
- criticisms of the banks for their actions in the pandemic.
Reductions in capital
The Bank of England has cut the amount of capital that banks need to hold to support their lending. Specifically, it reduced one element of bank capital, the countercyclical capital buffers, to 0%. Prior to the cut, the buffers were set at 1%, but were due to increase to 2% in December 2020. The Bank now expects to keep the 0% rate for at least 12 months.
Mr Carney argued the effects of the cut would be “huge”. He said it would release £200 billion of corporate lending capacity, more than 13 times corporate lending in 2019. The Bank said it could take this action because the banks were financially strong. It said that another element of capital, ‘tier 1’, was more than three times higher than before the 2008 crisis. The Bank’s 2019 stress test also suggested that the banks were resilient to a combination of severe adverse scenarios.
Term funding scheme
The Bank set out a term funding scheme with additional incentives for small- and medium-sized enterprises (TFSME). It said that the aim of the scheme was to ensure that the firms and households benefit from cuts in interest rates. It will provide funding for up to four years for banks and building societies at “or very close to” the Bank’s main interest rate, the bank rate. This rate was reduced from 0.75% to 0.25% on 11 March 2020 and to 0.1% on 19 March 2020.
The TFSME could provide an amount equivalent to at least 10% of existing lending. The Bank said that additional funds would be available to banks that increase lending, especially to small- and medium-sized enterprises.
In a joint letter, the Chancellor of the Exchequer, the new governor of the Bank of England and the interim chief executive of the Financial Conduct Authority (FCA) urged the banks to take “all action necessary” to pass on the benefits of the capital reductions and TFSME to firms and consumers. The Bank and the FCA said that they would be “monitoring the situation closely”.
On 19 March, the Bank announced a £200 billion expansion of its quantitative easing programme. This buys assets, such as government and corporate bonds, from banks and other financial institutions. It is intended to provide banks with cash that can then be lent out and to boost the economy though other channels. The expansion will take the total amount of quantitative easing from £445 billion to £645 billion.
The Bank said that it would watch credit conditions closely and that it “stands ready to take any further actions deemed appropriate to support UK financial stability”.
Dividends, pay and bonuses
On 31 March, the major UK banks agreed to suspend dividend payments and share buybacks until the end of 2020, and cancel outstanding 2019 dividend payments. This followed a request from the Prudential Regulation Authority (PRA), which had said that it would “consider use of our supervisory powers” if the banks did not agree. The PRA also said that it expected banks not to pay cash bonuses to senior staff, and to take “any appropriate further actions” on pay over the coming months.
Commenting on the suspension of dividends, the PRA said that it was a “sensible precautionary step” but that banks’ capital positions were “strong” and “more than sufficient”. It said that “the extra headroom should help the banks support the economy through 2020”.
The Bank noted other initiatives to support business lending set out by the Government. These included:
- the coronavirus business interruption loan scheme. This provides access to loans to smaller companies. Banks will provide the loans, but the Government will provide lenders with a guarantee of 80% of each loan.
- in conjunction with the Bank of England, the Covid corporate financing facility. Through this scheme the Government aims to help larger companies that have investment-grade credit ratings. The Government will buy short-term debt issued by these firms to help their cashflow.
The Bank also cancelled its 2020 annual stress test of major banks and building societies.
Mortgages and repossessions
The FCA has published guidance to mortgage firms in response to coronavirus. It said that, in general, companies should be prepared to offer three-month payment holidays. Under the guidance, firms would not be able to charge a fee for the holiday and it should not be placed on a borrower’s credit file. Lenders would, however, be able to accrue interest on the unpaid sums. The FCA said that it would continue to review the guidance and extend the holiday if necessary.
In the same notice, the FCA said that repossessions should not continue or be enforced during the current period.
Actions taken by banks
Actions taken by some banks include:
- Free overdrafts, or larger interest-free overdrafts.
- The Telegraph reported that some bank branches have been closed, and others are opening with restricted opening hours.
The joint letter from the Chancellor, the Bank and the FCA has been interpreted by some as a warning to banks not to “profiteer” from the situation by charging excessive interest rates.
Banks have also been criticised for asking for personal guarantees to back the business interruption loans—which are also 80% guaranteed by the Government. Several major banks said that they would not seek personal guarantees for smaller loans. The banking sector trade body, UK Finance, has said that for loans up to £250,000, banks are required to apply their “normal lending criteria”. Reports suggest that lenders are taking different approaches to larger loans. UK Finance said that for these, the scheme required lenders to take security.
Some reports have suggested that it is very difficult to contact banks, for example to request a payment holiday.
- David Crow et al, ‘Will the coronavirus crisis rehabilitate the banks?’, Financial Times (£), 1 April 2020
Image by Stevebidmead from Pixabay