Finding some balance is exactly what the UK economy needs right now, and a good dose of balance is what UK banks need right now too.
In the years leading up to the financial crash in 2008 banks simply couldn’t lend people and businesses enough money. Lending money was making banks, or so they thought, enormous profits. The trouble was that the lending criteria, especially in the US, made loans available that could never be repaid. The situation in the US became known as the subprime mortgage crisis.
The over lending was only discovered when it reached a point of no return, and banks across the world became ex banks or banks in serious debt to governments overnight.
In the UK the banks were bailed out by the government, funded by UK taxpayers, and were not selective about who helped them at that time
Since that point in time UK banks that survived have generally recovered, they have also put very stringent lending rules and criteria in place.
Long story short, for many businesses that want a loan, unless they have no need of that loan, and are prepared to put security in place to cover the value of the loan, so banks are not taking any risk, will not receive a loan.
Banks use a ratio to understand and monitor their lending called a loan-to-deposit ratio (LDR).
LDR is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period. The LDR is expressed as a percentage. If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements. Conversely, if the ratio is too low, the bank may not be earning as much as it could be.
In the current economic crisis caused by the COVID-19 pandemic banks need to ignite their memory and show some gratitude to the people and businesses who bailed them out post the 20018 crash, taxpayers. Banks were not selective about which people and businesses bailed them out, all contributions were gratefully received, so they need to be mindful of that now.
The Chancellor of the Exchequer, Rishi Sunak announced just over a week ago that the government would act as guarantor for 80% of all loans taken out by businesses to fund cashflow difficulties resulting from COVID-19. So, banks are taking very low risks in all the loans granted to combat the impact from COVID-19.
The UK government’s Coronavirus Business Interruption Loan Scheme (CBILS) is designed to provide small business owners in financial distress with access to up to five million pounds sterling in six-year term loans and asset finance or three-year overdrafts and invoice finance facilities. Loans are interest-free for borrowers for the first year (the government covers that); lenders under the scheme receive an 80% government guarantee on loan repayments
The banks however seem, from widespread reporting to have ignored the government’s use of the term ‘distress’ in many ways, by insisting that pre-crisis rules still apply.
In light of the actions of banks since the chancellor’s announcement, and with some hindsight, some might say the government should enforce the banks behave as requested. The government could bypass the banks, if the banks lack of cooperation make that necessary, and make payments directly to businesses.