Watch the webinar
Today's webinar took the form of a conversation between the CBI’s own Chief Economist, Rain Newton Smith, and the Executive Director for Financial Stability Strategy and Risk at the Bank of England, Alex Brazier. Rain used to work at the Bank of England, too, so this was a very financial discussion, dealing with subjects such as bank lending, the government’s loan schemes, and the experience of the 2008 crisis, among other things. Here are the key takeaways:
- The shape of the recovery – and how we can influence it
- Lending through the banks
- Improving access to finance
- The importance of grants…
- …and of China.
The shape of the recovery
Rain began her remarks by observing that “just ten days ago” she was talking about a “V-shaped recovery”. Now she – and other observers – expect “a longer sort of recovery”, perhaps shaped more like a “Nike swoosh”.
However, Rain emphasised that we have quite some degree of influence over the recovery: “How quickly we get there will depend on the measures we put in place.”
She highlighted three particular strands of influence. First, consumer spending: “Will [households] want to spend money? Or will we be more fearful?”
Second, the prospects for the labour market: “There have been over 300,000 applications [to the government’s Job Retention Scheme (JRS)] so far. It’s saved 2.2 million jobs already.”
Third, the prospects for businesses in general: “How many make it through this crisis? How many see light at the end of this tunnel? It does come back to cash flow.”
There are, of course, ways to improve outcomes in these three areas. For example, Rain mentioned the possibility of partial furloughs: “As we come out from the crisis, can we use [the JRS] part time? What does that look like for different sectors?”
Alex supported Rain’s thinking on the recovery by referring, on a few occasions, to the notion of a bridge. “This isn’t the bursting of a bubble, nor the turning of a boom,” he said. “Companies that were viable going into this should be viable coming out…. The way we’re going about that is to build a bridge between the two sides of the crisis.”
Lending through the banks
Of course, one of the main components of that bridge is the various finance packages that have been put in place between the government, the Bank of England and commercial banks – from the Coronavirus Business Interruption Loan Scheme (CBILS) to the Covid Corporate Financing Facility (CCFF).
Alex gave us a useful rundown of what these sorts of measures have meant overall. There is now, he explained, “£1.25 trillion of lending capacity” in the banks – “more than the corporate sector needs”.
He also emphasised that the banking system is the best means of getting this money to businesses. “It’s the normal way of providing credit” – and the banks, despite the huge operational challenges that they currently face, have the “knowledge, networks and infrastructure” to make sure that the credit is provided now.
But those banks do need to, in Alex’s words, “lean in” to the situation and do what’s required of them. “If banks lean into this and lend, they can help the economy. If they crouch in a defensive position, they harm the economy and, by extension, themselves.”
Improving access to finance
Are the banks leaning in? As Rain put it, “the system is starting to work.” The latest figures show that £2.8 billion has now been lent through CBILS, which is “an increase of £1.5 billion over just the past week”. One of our audience members revealed that they had received a “substantial amount of money” practically before they had “even signed the paperwork”!
But other audience members had less positive stories to tell. And it remains true that the £2.8 billion is a fraction of the £330 billion that the government has set aside for the scheme.
Rain suggested some areas of possible improvement. One would be to increase the government guarantee for smaller loans (under £25,000) from 80% to 100%: “It might be worth taking more risk at the smaller end, to get more businesses through to the other side.” Another might be to consider longer repayment terms – “extending the repayment from 6 years to 10 years” – for businesses whose seasonal sales patterns mean that they might struggle to start repaying at the start of next year.
On the possibility of increasing the government guarantee from 80% to 100%, Alex said that “it is very much a decision for the Treasury”. But he did suggest that the Bank of England is keeping tabs on how similar schemes are operating in other countries: “Sometimes what seems to be, on the surface, a no-brainer isn’t quite such a no-brainer.”
The importance of grants…
Rain emphasised that here is another way to get money to businesses: direct support, in the form grants.
Some businesses – in the retail, hospitality and leisure sectors – are already benefitting from £billions’ worth of grants that are being processed through local authorities. But, as Rain pointed out, there are “differences between local authorities” – some have processed a high proportion of their grants already, whereas others are being much slower.
Rain also suggested that the grants may need to start going out to other sectors: “At the moment, that direct support is focussed on high street shops. The government does need to start thinking about some direct support to other sectors. It’s expensive [for the Treasury]… but it is something we do need to think about.”
…and of China
Towards the end of the discussion, Rain also mentioned the crucial role of China and the rest of Asia in determining the shape of the global recovery: “Their return to the world economy, the return of those supply chains, could help us.”
But the trade flows could go in the other direction, too – particularly when it comes to services such as finance and education, which can be delivered digitally. “That may be something we’re still able to do, whereas physical goods are more difficult,” said Rain. “This could be a real opportunity for the UK.”
Key questions we answered
- To Alex, could you please fill us in on the thinking behind the action that has been taken by the Bank to date, including the Covid Corporate Financing Facility (CCFF)?
- As the recovery occurs, our aim is to ensure that the level of output and activity in the economy is as close to where it would have been had this crisis not occurred. We also want to ensure that the long-term scarring effect to the economy are as light as we can make them. Those are the overriding principles guiding our policies.
- Companies that were viable prior to the crisis should be viable as it concludes.
- To do this, the response has been to take historic fiscal action. The Office for Budget Responsibility are looking at a £220bn increase in the fiscal deficit in the second quarter of this year.
- The corporate sector will require a cashflow boost and the banking sector will have to play a major role in providing that credit.
- The BoE has opened a termed funding scheme which gives banks £100bn and then matches, or more than matches, any new loans banks give out.
- Over the past 10 years, we have built up significant buffers of capitals in banks that can be deployed when they need to expand lending or take losses. This was prudence with a purpose.
- In early March, we released £23bn of capital – banks then held back dividends which amounted to £7.5bn. Those two steps can support £250bn worth of lending in the banking system.
- The CCFF was then launched. This is toe lend to investment-grade large companies to take the pressure off the banking sector.
- The government have said it will guarantee 80% of new lending by banks, leveraging banks capacity to lend five times over.
- This enables banks to be part of the solution rather than the problem, as they were in 2008.
- To Alex, what can the Bank of England do if banks are not lending sufficiently?
- We understand these are commercial organisations, so there are limits.
- But we have put in place every condition required to enable banks to lend. This includes:
- Giving banks 4 years of funding for any loan they make.
- Over the last 10 years, we have been putting the capital in place – lots of banks spent those ten years complaining about bank capital requirements but now is the time to put them to use.
- We now have the state guarantees in place.
- There isn’t much reason not to lend here.
- We are not a command and control economy and cannot direct lending. One of the reasons we want banks to play a key role in this is because they have the infrastructure, networks, and relationships to lend efficiently.
- To Rain, Alex mentioned the CCFF, can you give us an update on the other main access to finance schemes available to business?
- On CBILS, UK Finance have just released the latest lending figures for the Coronavirus Business Interruption Loan Scheme, or CBILs as its widely known now.
- Show that the banking and finance sector has lent over £2.8 billion to SMEs through CIBLS – with total lending doubling in the week from 14 April to 21 April, with an increase of £1.45 bn.
- According to UK Finance, Lenders have received over 36,000 formal applications to the scheme from businesses. And 16,624 of these applications have been approved already, with more now being processed and expected to be approved over the coming days.
- It’s good to see that figure rising, and process for deploying these loans improving.
- Insight and input from business has also been vital. We’re continuing to feed in your questions and flag issues as they arise.
- However, some challenges remain:
- We need a quicker facility for loans under £25,000 – businesses at the very small end don’t have large cash reserves and are counting survival in days not weeks.
- And for some businesses, may need a longer time to repay their loans to help with viability assessments.
- To Alex, what is the best way for businesses to raise their concerns with the Bank of England if they are have difficulties with their banks in accessing the loan schemes?
- The pace with which the banks have picked this up. They started CBILs from a standing start and the processing of applications have grown exponentially. This is a difficult operation to carry through.
- If businesses want to report their experiences:
- The BoE has a network of agencies – get in touch with them via our website. They are our eyes and ears around the UK.
- Call the public enquiries line at the BoE, which can be used for businesses to register their experiences.
- To Alex, on CCFF, how can firms prove they are eligible if they don’t have an external credit rating?
- For context, this is a scheme authorised by the Treasury. We are lending billions of pounds of unsecured public money, so it is right that the Chancellor sets the risk appetite for this scheme.
- The Treasury have set the risk at Investment-grade firms – we think this is 400 of the largest companies in Britain accounting for approximately 25% of turnover in the economy.
- We are lending unsecured money at an upper limit of hundreds of millions, sometimes a billion, pounds with very few questions asked.
- Regarding how companies prove that they are investment grade, the obvious first step is by having a public rating.
- For businesses who don’t have a public rating, there are two ways to go about proving they are of investment grade. We have developed these mechanisms to evolve the scheme thanks to the input from the CBI:
- Come to the BoE to fill in an eligibility request and we will see if we can convince ourselves that the company is equivalent to having a public investment grade rating.
- We have an internal database of all lending banks internal ratings of companies they deal with – we can check quickly whether a company is consistently rated as investment grade.
- Sometimes things are not so clear cut. We are keen to ensure that everybody who can get over the line, does. So, we may ask you for more information via your banks to ensure you meet the risk criteria set by the Treasury.
- If we can’t meet these measures, there is another route: Go to a rating agency – details of which are on the BoE website – and ask for a private rating that can be passed to the BoE.
- To Alex, how should we weigh up the pros and cons of the government increasing its guarantees from 80 to 100 per cent?
- With an 80% guarantee, the government is leveraging up the banks’ capacity to lend 5 times over. This may amount to a total number that is far in excess of what we actually need.
- I don’t think the consideration is whether we need to increase the total amount required to lend. The consideration centre around very small companies where the processing required per pound lent for a not fully guaranteed loan is very high. The question will be what do we get for the public money we would be spending here to speed up processing for small businesses?
- To Rain, how do you reflect on the scale of this crisis compared to the 2008 financial crisis?
- Much like the financial crisis, what is happening now is hitting so many counties at the same time.
- In addition, today the global economy is more connected than it was in 2008. As China and Asia emerges from this crisis, that will help insulate our economy. In 2008, China was effectively out of the woods by 2009 and their growth helped pull the rest of the global economy out of the crisis.
- The intensity of the impact of this crisis on growth will be more severe in the immediate term but over the long term we should come out of it quicker than we did in 2008.
- In 2008, the crisis started in the banks and ricocheted to the wider economy. What we are seeing now is the impact in the wider economy and the banks are stepping in to help.
- Hopefully, we won’t see a return of the ‘dismal decade’ we had in the UK where while employment increased and remained strong, productivity and people’s incomes stagnated in real terms.
- If we get the policy right we should come out of this relatively quickly and won’t see the scarring effect on living standards.
- In 2008, the Chinese government decided to go on an infrastructure boom, modernising their economy at a speed and scale we have never seen before.
- Regarding the UK, you may see an uptick in appetite for the kinds of things we do well. For example, financial services, healthcare and education – all of which can now be delivered online – will be in more demand as countries take a cautious approach out of this crisis. Therefore, this could constitute an opportunity for us to exploit.
- To Alex, how important will government debt be in the next phase of this crisis?
- To compare this crisis to the one in 2008, over the past 10 years both the private and public sector have been prudent.
- Household debt is high, but interest rates are very low.
- Debt servicing burdens are very low for households.
- The same is true for the corporate sector.
- We also know over the last 10 years that the government have brought down the budgetary deficit and stabilised public debt.
- All these measures put in place the conditions required to enable us to borrow more to address this crisis.
- We are only able to do this because of the prudence we enacted over the last 10 years.
- To Rain, could you give us an update on the government’s ‘start-up package’?
- This is a new £1.25 billion package of support from Government, aimed at early stage and innovative companies.
- This includes £500m ‘Future Fund’ to support start-ups – with a May launch planned.
- Government loans ranging from £125,000 to £5m, subject to at least equal match funding from private investors.
- Focus is on businesses that rely on equity investment and are unable to access CBILs. Delivered in partnership with British Business Bank.
- Remaining £750m for SMEs focussing on R&D, available through Innovate UK.
- The first payments will be made by mid-May.