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BoE warns bank loan reserves may stifle corporate finance

By on March 23, 2021 0


The Bank of England has warned UK lenders against posting huge charges on soured loans, fearing it will limit their ability to support struggling businesses.

Representatives from the BoE’s Prudential Regulation Authority spoke to senior bank executives over the past week to advise them not to ‘kitchen sink’ in the first quarter of the year, several people said. at the Financial Times.

PRA worries after seeing global banks poster sharp increases in reserves for potential defects due to coronavirus blockages. The six largest U.S. lenders increased their loan provisions in the first quarter by a combined $ 25.4 billion, a 350 percent year-over-year increase. At Credit Suisse, the only European bank to report to date, the measure exploded 600 percent.

Banks such as Barclays, HSBC, Lloyds and RBS are releasing their first quarter results over the next two weeks. If their loan loss provisions were to increase in line with those of their US counterparts, they would take a big hit to their profits, while Barclays would likely run into deficit.

More important from a regulator’s perspective is that such careful default planning would affect capital levels, reducing the ability of banks to take out new loans at a time when businesses are in desperate need of credit.

Supervisors have already relaxed capital and auditing rules to ensure lenders do not encroach too much on their loss absorption cushions. They also have prohibited dividends and share buybacks to safeguard capital.

“Unless there is a significant increase, it will not be credible,” said one person involved in the discussions, “but the provisions should not be so massive that they absorb all the capital relief. . It is not realistic. “

This person added that the PRA had “given advice on accounting to ensure that banks do not take a mechanical approach that swallows up all released capital before it can be used.” The regulator wanted to see “realistic, sensible, prudent provisioning, which does not exaggerate”.

Under the new accounting rules, banks granting short-term forbearance to distressed customers would have to make larger provisions against expected credit losses.

But the central bank stressed that, for example, not all retail customers who request mortgage repayment leave are really in long-term financial difficulty, and therefore banks should not necessarily view their debt as in default. Officials gave the same advice on small businesses unable to repay their short-term loans.

At the center of the debate, the new international accounting rules known as IFRS 9, which require banks to immediately post large provisions on aggravated debt, rather than waiting to take losses only when they occur as in previous regimes.

IFRS 9 has been criticized for being “pro-cyclical” in that it exacerbates the pressure on banks’ balance sheets when they are most needed to support businesses in times of crisis, in this case the crisis. pandemic containment.

One problem with the implementation of IFRS 9 is that there is no official forecast from the BoE on the depth or duration of the blow to the UK economy that banks can use as a benchmark.

Estimates range from a 6.5% drop in UK GDP this year, made by the IMF, to a 13% drop, from the UK Office for Budget Responsibility.

“There is nothing that comes close to consensus on the impact of GDP, so there is an element of subjectivity,” said a British bank president. “You can come up with different projections and justify almost any impairment you want, so the PRA is. . . trying to ensure that there is a broad consistency of approach in this unusual environment. “

Evidence of disparate approaches can already be seen in other European banks subject to the same new accounting rules. This week, Credit Suisse increased its bad debt reserves sevenfold to $ 583 million in the first quarter, while Italy’s UniCredit put aside An additional 900 million euros, a much larger increase compared to the same period last year.

Indeed, the two used radically different economic forecasts. The Swiss lender sees eurozone GDP fall by 5% this year, while UniCredit braces for a cut of more than double that rate.

The PRA declined to comment.

Letter in response to this article:

Correct valuation of capital is the key to investing / By Mark Cardale and Dr Dean Buckner



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