BankingBanks remain strong amid pandemic

Banks remain strong amid pandemic

Partner at Price Bailey says banks are unlikely to file for bankruptcy as a result of the pandemic

While businesses struggle to preserve cash flow, banks are stronger than ever, says Paul Pittman, partner at Price Bailey.

“They [banks] are much healthier today. We are looking at a reduction of the UK GDP of five percent to seven percent, where the prediction is that it is going to be higher – but banks have a lot more capital, they have capital ratios up to 12 percent and they also have a lot more reserve,” he says.

Despite the government encouraging banks to lend some are refusing to take the risk – meaning there is a low chance they will go bankrupt.

“It is a very low risk. The reality is that banks are not lending very much. They are currently dealing with their own customers – they are not dealing with any new customers.

“And even for those who are looking at alternatives rather than CBILS as CBILS is quite a process to go through, they only lend to viable companies, companies that have retained profit in the last three years or did not go through negative stages in those three years. They will have clients on their books who are struggling, but they are not looking to lend any money to those,” he says.

Pittman stresses that the same applies to the Chancellor’s schemes.

“Funds that are being provided through the CBILS aren’t being provided to the zombie companies and the companies that would have probably filed anyway. It is being provided to businesses that are viable,” he says.

Amid the coronavirus crisis, Pittman alleges that banks are “looking after themselves,” meaning they are failing to cooperate with treasurers while “they have not been forced to provide any business loan” by the government.

As the odds for the bank to go bankrupt remain low, state insolvency is also unlikely as “it borrowed at a very low rate,” he says, while the “taxpayers over the next few years will pay a lot.”

As the 2008 crisis generated a banking collapse, the current pandemic is drastically different as it was not triggered by a financial element, says Pittman.

“This is not a financial crisis. The financial element comes into it but only because no one has any income. I have a business that has lost over 90 percent of its business over night, meaning they work on a 10 percent income for the moment. There are others such as restaurants that work on no income at all. It is unprecedented, but it is not caused by the financial aspects of it, it is caused purely by the health aspect of it.”

While the banking industry took a hit in 2008, banks are now regulated by central banks such as the Bank of England in the UK which ensures that deposits under £85,000 remain protected despite a bank failing – leaving a low chance for banks to go bankrupt.

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