Bad debts caused by Covid-19 will cause banks to lose less than £80bn, the Bank of England has predicted.
In its financial stability review, the Financial Policy Committee (FPC) judged that banks’ credit losses from loans set to go sour due to the coronavirus will be “somewhat less than £80bn”. This was slightly better than the bank’s forecast in May of “just over £80bn”.
The FPC said that banks have buffers of capital which are more than sufficient to absorb the losses and are resilient to a variety of possible outcomes.
After conducting a reverse stress test, the Bank of England said that banks were strongly capitalised to cope with a 15 per cent increase in unemployment and a drop in GDP twice as extreme as that of which is projected.
“Based on this exercise, the FPC judges banks to be resilient to a very wide range of possible outcomes,” the review stated.
“It would therefore be costly for them and for the wider economy to take defensive actions.
“It remains the FPC’s judgement that banks have the capacity, and it is in the collective interest of the banking system, to continue to support businesses and households through this period.”
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The forecast of “somewhat less than £80bn” of banks’ loans going sour, follows a report last month from the Recapitalisation Group, EY and lobby group TheCityUK, which predicted that small- and medium-sized enterprises will accumulate £97bn to £107bn worth of unsustainable debt by March 2021.
The report also estimated that to £36bn worth of government-backed business loans could become toxic by the end of March next year.
Today the Bank of England also voted to hold the base rate at the record low of 0.1 per cent and warned that the economy will take longer than expected to recover from the crisis.
Policymakers said that the economy would not recover to pre-Covid-19 levels until the end of 2021.