The Governor of the Bank of England told the BBC that extending government guarantees to lenders from 80% to 100% of loans granted could speed up the delivery of financial assistance to cash-strapped businesses.
Not surprisingly, the banks agree.
A major lender said that a 100% guarantee against potential loan losses would significantly speed up the loan approval process.
Banks currently do not think they can do without normal credit checks simply because they can “only” lose 20% of the amount advanced.
The most recent figures available show that out of a package of business support measures totaling £ 350 billion – one of the largest announced in the world – just over £ 1 billion has been advanced to date through the CBILS (Coronavirus Business Interruption Loan Scheme) program. .
There have also been calls from both sides of the political divide to increase the level of government support for the CBILS program.
Former Conservative Chancellor George Osborne and current ghost secretary Ed Miliband have both expressed support for the move.
Miliband said: “This is an important intervention by Andrew Bailey, the Governor of the Bank of England. He is absolutely right. The CBILS diet does not work. The UK is still far behind other European countries when it comes to lending to troubled businesses.
“We are facing an impending insolvency crisis if the adoption rate does not improve dramatically. The government needs to go further and urgently reform the system to guarantee 100% loans to small businesses. “
Today’s remarks by the Governor of the Bank of England – that a full guarantee could make the process “less complicated” – will add to the pressure on the Chancellor to follow the example of other countries.
American lenders have approved more than 300 times more loans than in the UK, while even Swiss banks have approved 98,000 loans. The latest figure in the UK is just over 6,000.
Extending the guarantee to 100% would mean that the taxpayer would take all the risk that the loans would not be repaid – a result which, according to Ed Miliband, creates “moral hazard”.
However, speaking to the BBC earlier this week, he said the “economic risk” of leaving thousands of businesses to withdraw was greater.
However, some financial sector sources argue that continued adjustments to the existing CBILS system could create more confusion for banks that are already operationally strained due to the high level of demand at a time when many of their own staff works from home.
The BBC also understands that proposals from the financial services industry are about to be submitted for support for small businesses to be provided via immediate and government guaranteed extensions of up to £ 25,000 in overdrafts on their current accounts, the most basic and widespread product that businesses use.