Bank of England chief: ‘So far, so good’ since furlough scheme end

Business Editor

BANK of England deputy governor Sam Woods declared yesterday that it was “so far, so good” on the economic front following the end of the furlough scheme.

Asked by The Herald about the central bank’s observations on the initial impact of the end of the UK Government’s coronavirus job retention scheme on September 30, Mr Woods replied: “I think it is too early to say other than we can say, ‘so far, so good’. So we haven’t seen anything that should concern us at this stage.”

Mr Woods, who is chief executive of the Bank of England's Prudential Regulation Authority, highlighted “very low unemployment” and rises in house prices as he described the economic recovery as “strong”.

He expressed confidence that banks would be able to support customers and the real economy through the recovery.

Mr Woods contrasted the situation with that at the time of the global financial crisis and highlighted the fact that UK bank capital ratios are at an all-time high amid the coronavirus pandemic.

On the question of whether there was a prospect of bad debts turning out to be worse than anticipated, as support measures unwound, Mr Woods said: “This has been a very unusual crisis from a financial services point of view…Bank capital ratios in the UK…are actually the highest they have been. It is an unusual crisis where capital ratios go up.”

He highlighted a “huge amount” of government support to “build a bridge across Covid”, noting the Bank of England had also “played a role”.

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Mr Woods, the Bank’s deputy governor for prudential regulation, said: “As we come into this phase, we are watching very closely to see – does more pressure come on as the furlough scheme ends. There is obviously some pressure on prices.”

While noting some “pressure points”, he added: “So far, so good. There has been no uptick in bankruptcies or insolvencies or credit defaults. So far it has looked pretty good.”

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Asked if he believed banks were in a better position to support customers than they were at the time of the global financial crisis, Mr Woods said the “thought experiment” to run in this context would be to consider what would have happened had Covid hit in 2007.

He highlighted his belief that, if that had happened, there would have been a “financial crisis as well as an economic crisis”.

Mr Woods said: “The authorities, governments through fiscal support, central banks through monetary support, have provided a massive sort of barrier, if you like, against the impact of Covid so the full impact...hasn’t really hit the financial system.

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“We have got to make sure the financial system stands behind customers. By far the most important thing is to make sure they (banks) have got enough capital. If they have got capital, they should be able to use it to support customers.”

Mr Woods highlighted the “uneven” nature of the recovery.

He said he had met “a lot of people” during his visit to Scotland on Monday and Tuesday this week.

Mr Woods added: “We do hear very different things from people who are in the tourism sector, from people who are in fintech…

“A lot of people are very busy. There is a tight recruitment market.”

He noted this had been the first work trip he had been able to undertake since the start of the pandemic and highlighted his wish to make this a visit to Scotland given the “very important financial services base” in Edinburgh.

Asked whether he saw a worsening of relations between banks and customers, he replied: “At this point, we are not expecting it to become more difficult, notwithstanding various pressures people are facing, particularly on the price of energy.”

Mr Woods highlighted unemployment and drops in house prices as the two main things that tended to lead to financial difficulties.

He added: “We have very low unemployment and house prices have gone up very significantly in recent times. I think that is a good place to be starting from.”

Asked whether things had gone better, worse or the same as he would have expected at the onset of the coronavirus pandemic from a financial stability perspective, Mr Woods replied: “I think if you look at the stability of the financial system related to where it could have gone at the outset of this thing, where we faced the biggest drop in the economy for hundreds of years…I think we are way at the top end of that.”

He noted he was paid to worry about such things, so did not say this lightly.

Mr Woods said it had been “a bit of a surprise” to him that bank capital ratios were the highest they had ever been and there had been a big house-price increase, in terms of what his expectations would have been at the start of the pandemic.

He added: “It is a good place to build from as we go through this recovery phase, which is obviously going to be tricky.”

On the question of whether the Scottish independence debate was something that the Bank considered in its financial stability deliberations, Mr Woods replied: “Honestly…it is just not something we are focused on. We have got our hands full with post-Covid, post-Brexit, climate and cyber.”

Asked about the main challenges ahead, Mr Woods replied: “The main two things I would point to – it is a good thing we have got this strong recovery but it is a tricky business getting through the recovery. I just want to make sure the financial system carries on its job [of] supporting the economy through that…I am confident it will do that.”

Flagging defence against cyber attacks as the second main thing, Mr Woods added: “I would point again at cyber…I think we are across it. I think we have defended the financial system well.

“I think it would be crazy to be complacent about that.”

Asked about principal sources of potential cyber attacks, Mr Woods replied: “There is some nation state activity, there is some criminal group activity from certain jurisdictions. I think we are well across that. I think we are well defended.”

Mr Woods also highlighted the Prudential Regulation Authority’s work on climate-change issues and on diversity and inclusion in the financial sector.

He also flagged an opportunity to shape regulation differently in the UK following Brexit.

Mr Woods said: “We have a plan, which is now advancing, to make a much simpler regime for little banks and building societies. Within Europe, it has always been difficult to make as much progress on that as we would [have liked].

“I think that will be very helpful to smaller banks and building societies…including those based in Scotland.”

He added: “We actually think, if we simplify the regime for them, it will be good for competition. We also think it will be good for safety and standards.”

Mr Woods emphasised, citing the building of the system after the last financial crisis, that the Bank of England’s “perspective” on financial regulation post-Brexit “is we should keep standards high”.

He added: “We can tailor the rules. We are looking at insurance regulation. We are looking at banking regulation.”