Whisper it, but the UK High Street banks must be quietly pleased with their reputations in this crisis so far. Quick to look after their people, quickish to get on the front foot and lend through CBILS (Coronavirus Business Interruption Loan Scheme) and on the front line with Bounce Back loans they’re part of Rishi Sunak’s “whatever it takes” tidal wave of support for the country. Mortgage holidays, no-questions-asked extensions to overdrafts, and a range of other measures to ease the burden on personal customers feel like a breath of fresh air at a time when the last thing we want is to feel stifled. I found myself humming the delightful Midland Bank “Bank that likes to yes” jingle of yesteryear as I typed this.
I doubt the banks are. Humming it that is. There are big risks here; in the early days of this crisis, welcome announcements from the UK Government seemed to suggest that there was free money to be had. Commentators urged furlough for everyone, loans for anyone. Bend the rules they said. Do not leave any stone unturned…
But these are difficult times. Your small business could have been viable pre-Coronavirus. You might have been paying yourself respectable dividends. If, like many businesses, you weren’t generating surplus cash though, how are you going to repay a loan when ‘normal’ times resume? There is cheap money, but it is not free money. Some customers who have banked in the High Street for years will not be able to borrow because there is no prospect of paying it back. Others that were only just surviving in the run-up may not make it through once any grants they have attracted run out and when the furlough tap is turned off. There are heartbroken and frustrated business owners up and down the country already asking why they can’t find support and journalists willing to listen. How do banks weave their way through this minefield?
At least the banks are well capitalised coming into the fight and that’s not the problem. The problem is, if you do lend to a business on the edge using CBILS and they don’t make it through, will we find a situation where, like with payday lending, businesses accuse the banks of lending to them knowing they couldn’t afford to pay it back?
In six to twelve months the Government’s Bounce Bank loans could well become an issue. Any SME that fits the criteria can self-certify to pick up a loan of up to £50k. You can apply for up to 25% of your turnover. These by their nature go through largely on the nod with no great investigation. Some of these self-certified loans could well cause the demise of businesses in the future. Again – if you didn’t have enough cash to survive this period going into Coronavirus… why will you necessarily be able to throw off enough cash to pay a loan back when we all come out?
The 100% mortgage, which was just creeping back in, will be rarer than hens’ teeth. First-time buyers may well be back to requiring 20% deposits while the industry watches the housing market. And the UK economy really needs people to buy houses and move to kick off spending in retailers, DIY shops and car showrooms (oddly there’s a huge correlation between house buying and car buying – buy a new house and a new car to dress up the driveway?).
How will banks look at credit risk? As long as people are sensible about the mortgage holidays and credit holidays they are taking and eventually begin to pay things back again (assuming they can) this period will be viewed as a blip by most lenders. But they will want to see behaviours returning to normal. It just might be slightly harder to get a 0% credit card or attract headline loan rates. Luckily there is nothing to do at the moment so there’s little discretionary spending. There’s evidence that people are paying down debt and their mortgages.
But then how will banks make money? They don’t want all behaviour to change. Otherwise, they rely on defaults and charges. Confidence was shot coming into this crisis. Brexit had dampened enthusiasm for a lot of projects and purchases for businesses and consumers both. Despite 2% GDP growth (how we’d love to see that again) businesses and consumers weren’t really borrowing. Not as many people were moving house. And no one buying cars. The banks will need to lend.
Quite apart from the risks I’ve outlined here, banks will need people to borrow. How do they get businesses to take risks? How to get them to invest in new assets, premises, people? And how do they manage that with so much Government money swilling around? How will they encourage people to move home? To invest in their properties? To buy cars? To build? To take risks at a time when we’ve been sent home and told to hide away. They can’t leave that job to Government.