Throwing a ball at a wall is easy; catching it on the rebound is harder. The UK Treasury’s loan scheme for small businesses — the £58bn Bounce Back Loan Scheme — chucks taxpayer money at a towering threat, the loss of income due to the pandemic. While there are echoes of earlier programmes, this one is fully guaranteed by the Treasury. When delinquencies begin, banks will risk their reputations rather than their capital as they try to collect debts.
Many small businesses have struggled to make ends meet as consumers have reined in spending. Despite some recovery, almost a sixth of them remained shut in September, according to the Office for National Statistics. Some lenders have been slow to dole out the government’s largesse.
Banks should be keen to be seen as agents for good in this crisis. The last one shredded their reputation. As the financial system tottered, high-street lenders tightened terms or yanked credit from small businesses. A government prodded by angry voters “encouraged” the Project Merlin loan scheme. Banks promised to lend about £76bn while curbing executive pay. Most pundits saw it as a flop.
This time really is different. Banks did not cause the crisis and have remained functional during it. Bounce back loan terms are attractive, with rates of 2.5 per cent fixed, interest-free for the first year, set well below market levels.
Even so, banks will attract criticism again. First, the new scheme will probably miss its target limit. A recession depresses the appetite for credit. Second, default rates will be high, perhaps up to 40 per cent. Third, borrowers that banks turn away as unviable will angrily dispute that judgment. Fourth, a proportion of successful borrowers will prove to be zombies, fraudsters or companies with wealthy backers.
Banks can limit the damage. They can handle applications as a priority rather than a chore. They can avoid pillaging weaker small businesses as a couple of lenders did last time. And they can forget big payouts to the chief executive, even if the bond-trading desk has been doing nicely.
Bounce back loans are part of a broader stimulus package. The state has implicitly recognised that moral hazard is worth tolerating in return for protecting thousands of decent businesses from collapse. It is right to do so.
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