By Scott Wright
THE UK banking regulator is to ask the country’s major lenders to share their forecasts on the extent to which bad loans will rise because of the coronavirus pandemic.
With the UK economy on the brink of a deep recession, following the mothballing of economic activity to combat the virus, the Prudential Regulation Authority (PRA) said it would gather information from banks on their provisions for loan defaults increasing before reporting their results for the second quarter.
The move comes after the country’s biggest banks revealed huge provisions for higher bad-debt charges because of the dislocation sparked by the Covid-19 pandemic in their first quarter results.
Publishing its first-quarter results in May, Royal Bank of Scotland made a £628 million provision against the worsening outlook, which helped drag first-quarter profits down by 60 per cent to £288m. Bank of Scotland owner Lloyds booked an impairment charge of £1.43 billion as it too anticipated bad-debt charges will rise, leading profits to tumble to £74m for the months ended March 31, compared with £1.6bn for the first quarter of last year.
In a letter to chief executives, Sam Woods, deputy governor of the Bank of England and chief executive of the Prudential Regulation Authority, said the information gathered would be compared with the regulator’s own modelling on losses which might be experienced because of the crisis.
A desktop stress test carried out by the central bank estimated the UK’s major banks and building societies could experience credit losses of £80 billion by the end of 2021. The interim Financial Stability Report (FSR) was published at the same time as latest Monetary Policy Report in May. The MPR, published by the Monetary Policy Committee, warned that the UK was heading for its worse economic slump in more than 300 years.
“Unlike a regular stress test, the desktop stress test did not draw on submissions from banks,” Mr Woods said in the letter. “Ahead of banks’ Q2 2020 reporting, the PRA intends to gather further information firms on estimated levels to enable us to compare the timing and amount of losses modelled under the FPC desktop stress test to those anticipated by banks. This information will enable us to identify any significant outliers and to further refine our estimates for future capital exercises.”
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