Chancellor rejects proposal for state body to refinance bad loans

Chancellor Rishi Sunak is reportedly set to rebuff calls for a public body to deal with the impending wave of defaults expected on government-backed business loans.

A task force called the Recapitalisation Group, led by trade body TheCityUK and advisory firm EY, has asked the government to create a state-owned body to refinance the anticipated tens of billions of pounds of bad debt.

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But the Treasury has rejected the proposals, according to well-placed sources cited in The Financial Times report, due to fears they could shift the balance of risk away from banks and towards taxpayers.

The Treasury believes banks should deal with the cost and reputational risk of chasing borrowers that default.

The government’s lending schemes have provided nearly £53bn to around 1.2 million businesses to date.

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The Office for Budget Responsibility has said that around £33bn would need to be written off the value of state-back loans in its worst-case scenario.

“While we have some sympathy for the government’s argument in ensuring banks are incentivised to pursue debts as per normal practice, one could argue that the mere presence of a government guarantee already creates these moral hazard risks and putting in place a mechanism for banks to easily avail of the guarantee, thus enabling them to deploy resources in other parts of the business to support new lending for example, would be a sensible policy approach,” said analysts at brokerage Goodbody.

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“We suspect this will continue to be a point of debate in the lead up to the unwinding of the government-backed lending schemes, with the deadline for CBILS applications set as 30 September while the BBLS scheme will finish on 4 November unless extended.”