Bank of England probes how long banks can survive the lockdown

Bank of England officials have launched an investigation into how long banks can survive the lockdown, as Britain’s biggest lenders set aside an estimated £3.4billion to cover defaults on loans.

The results of the tests are expected to inform the Government’s strategy on how quickly to reboot the economy.

The Bank of England has already said that it will report on the health of the financial system in early May after updating its ‘stress tests’ to factor in a pandemic.

But a separate investigation into the length of the lockdown is also being conducted.

Sam Woods, head of the Bank’s Prudential Regulation Authority, told MPs on the influential Treasury Select Committee that tough regulations meant banks had more cash in reserve than in the 2008 financial crisis.

But he warned that the rules were not designed for an extended, economy-wide lockdown. He said: ‘We are going into this with a well-capitalised banking sector.’

But he added: ‘There is of course some limit at which you get beyond what we have provided for. I think if you had a multi-year total shutdown, evidently that is outside what we capitalise the system for. We are doing work to try to work out where you hit that point. My guess is that is quite a long way out.’

Pressure is building on banks’ balance sheets as more firms go to the wall every week that Britain is in lockdown. Central bankers will now work out how many loans lenders can afford to write off without crippling the financial system.

Investors will see the first signs of strain this week, when the ‘Big Four’ – Barclays, Lloyds, RBS and HSBC – report stark figures for the first three months of 2020. As well as setting aside cash to cover loan and credit card defaults, they have seen turnover shrink with the mortgage market on hold and the base rate cut to just 0.1 per cent.

Analysts warned that precise forecasts had become impossible, but UBS predicted RBS’s profit for the first quarter would fall 73 per cent, from £1.2billion to £327million as it earmarked £657million for bad loans.

It said Lloyds could be setting aside £1.1billion for defaults, which would knock its profit by 53 per cent to £1billion.

Barclays is tipped to have set aside £980million cutting its profit 77 per cent from £1.5billion to £353million. HSBC could have set aside £650million, cutting its profit 12 per cent to £4.5billion.

Gary Greenwood, an analyst at Shore Capital, said: ‘We’ve got one of the worst economic scenarios we’ve seen, but one of the most significant Government support packages. I don’t think this will be of a magnitude to require emergency equity issuance [share sales].’