UK banks: term funding stop will ricochet harder than bouncebacks

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Industrialist J Paul Getty quipped that when you owe the bank as much as $100mn, the loan is no longer your problem, it is the bank’s. The conundrum for the UK government and some banks is, however, quantified in billions, thanks to pandemic-era loan schemes.

Lenders disbursed some £77bn of loans under emergency conditions. The British Business Bank provided new insights on Wednesday, thanks to a freedom of information request from Reuters. Some £1bn of government guarantees no longer apply. 

The priority of the government at the height of the pandemic was to get money to businesses and stave off economic collapse. Chancellor Rishi Sunak extended government backing to the loans. This was controversial in the case of the Bounce Back Loan Scheme for small businesses. Here, affordability and credit checks were skipped and credit losses of up to 100 per cent covered by the state.

Most of the £1bn of voided guarantees related to loans made under the BBLS. Reasons included duplicate loans, errors in applications and infringements of scheme rules. Even so, losses for UK banks are going to be tiny.

About half of BBLS loans made by the Big Four UK banks are either on schedule or have been repaid in full. The government had already paid out £7bn of guarantees as of June this year, with the ultimate cost met by the taxpayer.

Banks have repayments of their own to make for Bank of England funding used to finance emergency loans. The £175bn Term Funding Scheme with additional incentives for SMEs (TFSME) gave banks four-year funding at Bank rate in the first year of the pandemic. 

Banks will have to start repaying the money early next year. This is already having an impact on banks’ behaviour. They have been increasing deposit rates, in a bid to lure savings to replace TFSME fundings.

At NatWest deposit rates jumped 70 basis points in the third quarter, results last week showed. For every 10bp increase, sector profits fall by £1bn or 5 per cent, estimates Jonathan Pierce at Numis.

That is a bigger concern for bank shareholders than billions of losses from loan schemes largely covered by the UK taxpayer.

The Lex team is interested in hearing more from readers. Please tell us what you think of pandemic-era loan schemes in the comments section below