UK Insurers, Banks Are Weathering Effects on Capital of COVID-19 Crisis: BoE’s Woods

By and | April 16, 2020

Britain’s banks have enough funds to keep lending to the economy even under the deep recession scenario outlined by a government watchdog, Bank of England Deputy Governor Sam Woods said on Wednesday.

The BoE has allowed banks to tap 23 billion pounds ($29 billion) of their capital buffers to support up to 190 billion pounds of lending, well above a net lending to companies of 16 billion pounds last year, Woods said.

“We go into this with a well capitalized banking sector,” Woods told a meeting of parliament’s Treasury Select Committee.

It was “not at all obvious” that the scenario outlined by the Office for Budget Responsibility on Tuesday was worse overall for banks than last year’s BoE stress test for lenders, Woods said.

The OBR said Britain’s economy could shrink 35% during the three months to June due to coronavirus shutdowns, then bounce back sharply afterwards, giving an overall economic hit for the year of about 13% – still the largest in more than 300 years.

“Banks have ample capacity from a capital point of view,” Woods said.

A “huge support package” from the state also reduces the hit on the banking system, Woods said.

Sarah Breeden, executive director for bank supervision at the BoE, said Britain’s biggest companies have drawn tens of billions of pounds on credit lines from their banks, but they have yet to spend it.

“In the near term, for largest companies that risk of default does not feel very immediate,” Breeden said. “The shock hasn’t yet hit in scale,” she said.

Britain’s banks are offering loans under a government-backed scheme to help businesses stay afloat during the national lockdown, but it is unclear if all of the companies will survive.

“The capital treatment for these loans is strong enough to cover the losses that should arise in the normal way from making loans of this kind,” Woods said.

Lawmakers also sought reassurances that banks were not profiting from the crisis.

“I find it very hard to believe that the banks will profit from this crisis, I think it’s a question of how significant will the losses be,” Stephen Jones, chief executive of UK Finance, a trade body for banks, told the lawmakers.

Insurance Hit

Britain’s insurers have taken a hit from large falls in financial markets which they have “broadly weathered quite well.”

The hit has left insurers with a coverage ratio, a measure of ability to service debt and obligations, of 130-160%, down by up to 20 percentage points, Woods said.

The BoE is now checking whether insurers have enough capital to cover policy claims for disrupted travel and interrupted business.

“We think we have that covered in capital requirements and provisions, but you never know until a thing flows through completely,” Woods said.

The BoE is also checking on the “painful” impact of downgrades to bonds held by insurers to make sure these are covered, Woods added.

($1 = 0.7981 pounds) (Reporting by Huw Jones and David Milliken; editing by David Evans)

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