News & Analysis

Jubilant banks celebrated in Q1, but a nasty shock may be looming

Andrew Saks, Monday, 24 May 2021

It was inevitable.

The British government, keen to ensure quiet compliance with its policy over the past year but without the means and resources to effect it, came up with the idea of paying people to close their businesses down, and then transferred the risk and responsibility to the banks.

Many businesses which had been either forcibly closed down by the government or had their customer footfall or distribution channels affected by lockdowns were able to apply for a Bounce Back Loan (BBL) which was advertised and promoted by Chancellor of the Exchequer Rishi Sunak, but were in actual reality issued by Tier 1 banks with the government offering collateral security.

Thus, there was very little underwriting taking place with regard to issuing these loans to businesses, many of which viewed them as government-issued 'free money' at a time during which mere survival was at the forefront of many business owners' minds. With no repayments for one year, and the chance of a quick lifeline during a period in which many small to medium sized business owners were extremely concerned for the future of their livelihoods, take-up was huge.

Here we are, a year on, and the first repayments are now due. What? These are loans, and are repayable? Surely the government forced companies to lock their doors for almost a year in total, hence this is a government bailout. No. It's a loan, and now needs to be repaid, and who will foot the bill when businesses inevitably default on the repayments, or have long since gone out of business?

The already overburdened taxpayer, and the banks that issued the loans will pick up the tab. The government offered collateral of up to 100% of the total amount borrowed, but that still exposes banks to a huge potential default, and if the state has to pay the banks back, a massive hole in an already crippled national economy.

Many other nations which locked businesses down as hard as the United Kingdom did were nearby nations in North West Europe, and did not offer such schemes, leading to unrest and backlashes against the lockdowns as well as many businesses that collapsed quite quickly as a result of an immediate cessation of revenue which has damaged personal empowerment and the business environment in those nations tremendously but has not exposed the state or the banks to vast debts.

The British scheme created the opposite effect in that it engendered almost total compliance whilst not damaging the perceived bottom line. During the past few weeks, reports of economic booms have littered the airwaves, and

many banks reported massive profits for the first quarter of 2021.

Now, as the repayments for these loans fall due, who will pay and who won't? Who is no longer in business and cannot be chased for money due to limited liability status, and who has taken the money and run away?

 

The Serious Fraud Office has launched an accelerated investigation into the extent of fraud that has surrounded these loans, as a kneejerk reaction to the reality that up to 60% of businesses may default on the loans landing the taxpayer and possibly the banks with a £26 billion black hole.

Some legal experts anticipate that there is a possibility of some of the funds being expatriated, with borrowers skipping the country to avoid paying them back, and others will declare their businesses insolvent and have the amount written off with no recourse for the government or banks, and then can pay £12 to establish a new limited company the next day and carry on with their business.

It is unlikely that many of the outcomes of these investigations will result in a guilty verdict, and more likely that the businesses which took these saw them as a lifeline when it was needed, expecting the lockdowns to end in just a few weeks, but once they were prolonged further, businesses ran out of capital and became insolvent, lumbering the banks and state with the debts.

Next quarter's bank results and British pound values will likely be the reference points on which to judge the fall-out from this set of circumstances.

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