April 27, 2020 / 5:01 PM / a month ago

BoE says UK state credit guarantees should limit banks' loan risks

FILE PHOTO: A security officer stands outside the Bank of England, as the spread of the coronavirus disease (COVID-19) continues, in London, Britain, March 23, 2020. REUTERS/Toby Melville

LONDON (Reuters) - The British government’s 80% guarantees to banks for emergency coronavirus-related lending to companies should generally reduce the amount of capital banks need to cover loans that are at risk of not being repaid, the Bank of England said on Monday.

British banks begin reporting first quarter results this week and their shareholders are braced for a ballooning in provisions for souring loans as the UK heads for a deep recession.

Britain has launched schemes whereby the bulk of loans to help tide companies through the pandemic are backed by the state, rather than lenders taking on all the risk.

The BoE said it was making “observations” on whether such state-backed guarantees mitigate risks from such loans and hence reduce the provisioning needed.

“The schemes do not contain features that would render these guarantees ineligible for recognition as unfunded credit risk protection, and the effects of these guarantees would appear to justify such treatment,” the BoE said.

It is the latest attempt by regulators across Europe to persuade banks to look beyond the pandemic and take into account state guarantees and other temporary relief measures being offered to companies when it comes to judging provision levels.

“In the current extraordinary circumstances, it will be challenging for many businesses to provide forecast financial information with a high degree of confidence to support firms’ loan underwriting processes,” the BoE said.

Reporting by Huw Jones and David Milliken; Editing by Gareth Jones

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