BOE’s Bailey Says Banks Need to Get On With Loans to Firms

(Bloomberg) --

U.K. banks must get on with providing loans to small and medium-sized businesses to counter the economic shock from the coronavirus pandemic, according to Bank of England Governor Andrew Bailey.

Asked about scenarios presented by the public spending watchdog this week that showed economic output could plunge 35% in the second quarter, Bailey said that isn’t implausible.

The central-bank chief told reporters in a teleconference on Friday that he is “not sanguine” about lending, with companies struggling to access the Treasury-backed financing needed to stay afloat despite BOE funding. Banks so far have loaned just 1.1 billion pounds ($1.4 billion) under the Coronavirus Business Interruption Loan Scheme.

While acknowledging that the massive volume of applications -- at a time when banks are struggling to keep their own staff healthy and able to work -- means the program faces heavy challenges, Bailey said that problem must be overcome.

“From an operational point of view, I’ve talked to banks a number of times. I’ve made it very clear to them,” he said. “They’re under no illusions that they’ve got to get on with this.”

Bailey also touched on the debate as to whether the Treasury should consider guaranteeing more than 80% of any loan losses -- even going up to the full 100% -- for small businesses. Any such decision should come from the Chancellor of the Exchequer rather than the central bank, he said.

The BOE has worked closely with the government to unleash a raft of measures aimed at supporting companies and individuals through the coronavirus pandemic and lockdown. Failure to get money out to businesses fast enough could lead to the kind of economic “scarring” that the BOE is keen to avoid in order for the economy to recover.

“The question is, is the level of unemployment, the level of business failure, going to be such that there will be scarring effects,” Bailey said. “Not everything will come back.”

The government hasn’t yet accessed its overdraft with the BOE, despite an extension announced earlier this month, Bailey said. The Ways and Means Facility is a short-term tool to maintain cashflow if normal debt management operations aren’t quick enough.

The Monetary Policy Committee will set out new forecasts in its May 7 policy meeting, although judgments will be difficult, he said. Any central case would have to factor in significant amounts of uncertainty, he added.

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