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Four things we learned from bank testimony to MPs on coronavirus lending schemes

MP’s questioned commercial banking heads to ask about the progress they are making to lend to businesses during the COVID19 pandemic. There were some key insights into what the banks are having to handle during this time of systemic stress, writes ICAEW Financial Services Faculty commissioning editor Brian Cantwell.

The Treasury Select Committee in the first week of May was a great opportunity to gather insights on how the banks were managing during the pandemic.  
The committee featured: 

  • Amanda Murphy, Head of Commercial Banking UK, HSBC.  
  • Paul Thwaite, CEO of Commercial Banking, Royal Bank of Scotland.  
  • David Oldfield, Group Director and CEO of Commercial Banking, Lloyds Banking Group.  
  • Matt Hammerstein, CEO, Barclays Bank UK  
  • Anne Boden, CEO, Starling Bank  

They answered questions on how the banks were handling the four main government lending schemes designed to support businesses through coronavirus. 

But there were some interesting takeaways to bank activity that came as a result of the session. 

Banks are playing the role of adviser as well as lender 

There was consensus that many of the banks had been playing adviser as well as lender, which has added time and complexity to the process of getting the government money out to business. 

“They are looking for forbearance or help and breathing space for their businesses,” said Lloyds Bank director David Oldfield. 

Banks were “advising on what the future looks like for businesses and planning under new social distancing guidelines for businesses like restaurants, hotels and clubs.” 

The feedback to MPs was that this extra consultation was adding workload to bank staff handling customers.  

Banks were arranging finance extensions for existing customers in greater numbers than arranging the government loan 

Many businesses have sought loans through the CBILS scheme and have been directed to extend existing business finance facilities as it was simpler, said several of the bankers. 

As an example, Lloyds have made capital repayment holidays for 40,000 existing customers, as well as providing them with short term overdrafts, in comparison with writing 4500 CBILS loans.  

Additionally, the CBILS application format was based on the previous government Enterprise Finance Guarantee Scheme which was quite a dogmatic process and excluded certain sectors, although the banks said they were not excluding any sectors. 

Banks have an uneasy eye on the future 

Banks are preparing for large defaults via IFRS9 loan loss provisions in both their consumer and commercial lending. 

A significant proportion of the 6.3m people who entered the furlough scheme will not have jobs to return to, and businesses will fail if spending does not recover.  

Barclays said consumer spending is down 30% on its debit cards year on year and 50% on credit cards year on year. 

Future default rates on government loans will most likely be linked to the economy, said Lloyds. Social distancing will inevitably challenge consumer spending, either through practicalities or behaviour change. 

Matt Hammerstein, Barclays UK chief executive officer said: “We have created a breathing space, now the bridge needs to be built to make sure that when payment holidays end we continue to allow people to pick the best treatment for their needs. We need to support the people with the most acute needs.” 

Interestingly, Starling Bank is not seeing a huge number of payment holidays but the most volume challenge for consumer travel and holidays refunds.  

Anne Boden, Starling Bank chief executive officer said Starling was prepared to process charge backs and it was seeing way more demand for that service than any other of its consumer banking services. 

Access to CLBILS is quick but could there be future problems? 

RBS said the squeezed middle businesses were finding credit market tight.  

It had £120m pipeline and £1bn of loans being discussed for bigger businesses, but it had supported around 100 mandates.  

It suggested that the tenure for the scheme being capped at 3 years could create refinance risk in the future for the banks and clients and raise questions for auditors. The risk could manifest if all the businesses using the CLBILS scheme refinance at the same time.   

RBS has fed this back as a potential maturation challenge in three years’ time to the government.