Banks could net £26bn from businesses relying on bounce back loan scheme

On Thursday, the Treasury announced that businesses using the government’s COVID loan schemes saw their debt increase by a combined £4.62 billion over the past month.

This figure, which includes the £2.18 billion added by the 100% government-guaranteed ‘bounce back’ loans, is only set to rise, with authorities pushing new regions into more stringent restrictions each day.

As highlighted by non-profit research group, Positive Money, the latest numbers illustrate a worrying trend: banks are being offered fully-backed profit instruments off of the backs of desperate people (ironically, there’s nothing too abnormal about that). What is abnormal, though, is that many typically healthy businesses are now in need, only because they abided by the rules and closed their doors for lockdown – and they’re now paying the price.

Speaking on the issue, Positive Money’s executive director, Fran Boait, said:

“Burdening businesses with unsustainable levels of debt isn’t the right way to support them at this time. Many of these businesses will struggle to repay, and a growing private debt pile risks dragging down any economic recovery and even a financial crisis.”

“The government’s backing of bank loans has socialised the risks of lending, whilst privatising the rewards. Banks will be netting more than £1bn a year from interest payments on loans that are fully guaranteed by the state.”

“In this next phase of lockdowns, support to small businesses should be provided more in the form of grants and other instruments, rather than more piles of debt. The government must also follow Switzerland in ensuring that banks aren’t able to profit from interest payments on state guaranteed loans.”

In Switzerland, where the ‘Bounce Back Loan Scheme’ was pioneered, banks are not allowed to charge interest on fully guaranteed loans. In the UK, however, lenders are able to charge interest rates of 2.5% on these types of loans, which could see banks receiving over £1 billion per year in interest from indebted businesses. An investigation by the National Audit Office also added that through the Bounce Back Loan Scheme, the government could be handing lenders a total of up to £26 billion.

The result of this bank payday isn’t just an added burden on businesses trying to regrow, but also the potential for a second banking bailout in little over a decade. Having shouldered the cost of lenders’ mistakes after the 2008 crash, the struggles of UK citizens will now make up a sizeable chunk of lenders’ balance sheets over the coming years. Once again, it looks to many to be a reincarnation of ‘rugged individualism for normal people, socialism for banks’.

In fact, it’s probably worse than that. It’s now more like: ‘abide by government guidance, and pay a large corporation for the privilege of doing so’. Indeed, as stated by Ms Boait:

“The fact these loans are fully backed by the government means that we could be walking into another implicit bailout of the banking sector when they fail, with the public paying billions of pounds to cover banks’ losses and protect their balance sheets.”

“This would represent yet another transfer of wealth from the public to the banks. The government must learn the lessons of 2008 and make sure that any bailout, implicit or otherwise, involves conditions which would restructure Britain’s broken banking system so that it helps serve the public good.”

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Senior Journalist at the UK Investor Magazine. Also a contributing writer at the Investment Observer, UK Property Journal and UK Startup Magazine. Postgraduate of King's College London with a specialisation in Business Ethics. Interested in Development Economics and David Hume.