MNI POLICY: BOE Woods: Banks Can Withstand Jobless Surge

-Woods Reveals BOE's Commercial Paper Facility Lending Heavily

By David Robinson

     LONDON (MNI) - Stress tests show UK banks could withstand the surge in

unemployment projected by the Office for Budget Responsibility, the Bank of

England's Deputy Governor for Prudential Regulation Sam Woods said on Wednesday.

     Woods spoke to the Treasury Select Committee the day after the OBR, the

fiscal forecaster, published an alarming scenario showing a 35% quarterly fall

in GDP in the second quarter and unemployment rising to 10% as a result of the

coronavirus hit. Woods said the jobless rise was in line with the one in the

Bank's 2019 stress tests which the banks passed.

     "The OBR put this forward as one scenario and there is a lot of

uncertainty, but it is not implausible .. they are very well informed," Woods

said.

     He noted that while the OBR forecast a plunge in GDP it also projected a

record-breaking rebound, with an 18% GDP increase in 2021, in a V-shaped

recovery.

     The Bank's 2019 stress tests only assumed a 4.7% drop in GDP, but predicted

that this would lead to the UK unemployment rate rising to 9.2%, with Bank Rate

spiking to 4%. The OBR's scenario is based on near flat Bank Rate.

     "The unemployment figures across the OBR forecast and ours are reasonably

close. You also have this huge support package from the state .. That looked at

from the position of a prudential regulator reduces the hit on the system,"

Woods said.

     Woods was also questioned about how much funding has been provided by the

Bank's commercial paper scheme, which allows investment grade firms access to

post the securities as collateral.

     "The very latest number I have .. is GBP7.6 billion. So that is actually

going at a pretty decent clip," Woods said.

     That sum dwarfs the GBP1.1 billion lent by the Treasury's much-criticised

Coronavirus Business Interruption Loan Scheme (CBILS), which provides financial

support to SMEs via commercial banks with the Treasury underwriting 80% of

loans. The CBILS scheme has struggled to gather pace with the banks having to

assess loans and seek collateral to cover themselves against defaults.

     The commercial paper scheme "is by volumes of companies a much smaller and

therefore more operable scheme than CBILS is," Woods said, as it only covers the

upper end of the market, with only 237 firms having applied so far.

     The BOE will present its own assessment of the likely hit from the

coronavirus in its May Monetary Policy Report.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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