EDITOR NOTE: “Can you foot the bill for your own failure, or will your collapse cause a disorderly take down of the UK economy?” That’s virtually the main message contained in a letter that the Bank of England sent to its largest “bank bosses” and insurance companies. With COVID ravaging the solvency prospects of small to medium sized businesses in the UK, its central bank wants to know exactly what it's dealing with and whether their economy can absorb a blow they suspect will come sooner or later. In the US, we’re facing similar prospects; perhaps not as bad as in the UK, but what does that matter if, on an individual basis, your household faces the risk of ruin?
The Bank of England has written to UK bank bosses telling them to review their exposure to losses that could emerge from businesses hardest-hit by Covid-19, as part of efforts to head off potential risks to the financial system.
The review is likely to cover the accommodation, food, retail, leisure and construction sectors, which have been battered by travel restrictions and strict social distancing measures, as well as regional and nationwide-lockdowns imposed since March.
The Bank outlined its plans in a letter to the chief executives of UK banks on Tuesday, saying it was expecting an increase in customers facing financial difficulty, as well as borrowers falling into arrears and default, next year.
The central bank’s Prudential Regulation Authority (PRA) is already conducting three reviews looking at the risks linked to small and medium-sized businesses, the buy-to-let market and the way banks collect the debts of ordinary customers.
The new review of the sectors hardest hit by the Covid crisis will cover companies included in the lenders’ wholesale portfolios, which deal with some of the biggest corporate clients on their books.
“We anticipate further thematic work on wholesale portfolios in potentially Covid-19-vulnerable sectors, plus some international portfolios subject to challenging economic and credit risk conditions,” the letter said.
The PRA added it would continue monitoring banks’ financial health throughout the crisis, including their ability and willingness to continue lending to businesses and households.
In a separate letter to insurance bosses, the central bank said insurance firms would have to prove that they could collapse without damaging the UK economy, setting out how they could wind down in an orderly fashion. It will be the first time insurers are required to submit so-called living wills to the regulator.
The central bank warned insurers: “We have very low tolerance for disorderly failure and its costs for policyholders and the wider economy.
“We will expect firms to demonstrate that they have a suitable structure and business model, and adequate contingency plans to be able to exit the market smoothly without detriment to policyholders or spill-overs to other firms.”
Banks are already required to submit living wills to the PRA to show that they could afford to foot the bill for their own failures. However, while banks’ living wills will eventually be made public, the PRA is not currently planning to release insurers’ blueprints in the same way.
Originally posted at The Guardian