The Bounce Back Loan Scheme 4  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  4  guarantees 100% of loans of up to £ to small businesses. Banks are taking little risk with their own funds when they lend now. With the space to lend, the funding to lend, and the credit guarantees to lend, banks have every assistance to help businesses finance cash-flow deficits. And unlike in the financial crisis, the banking system has the strength to lean into this crisis, to refinance existing loans and meet the demand for new ones. Banks will face losses in coming months on loans made in the past as some businesses and households struggle to meet repayments. Due to the reforms of the past decade, banks have the buffers of their own shareholders’ capital to absorb those losses on existing loans without cutting back on support for new lending.6  The final element of the support for bank lending has been to allow banks to use their buffers of capital without fear of regulatory actions. Buffers of capital are there to be used in stress to absorb losses while continuing to lend. We expect them to be used as needed.7 In fact, with government guarantees and funding in place, the prudent thing for banks – collectively – to do is lend. Failure to help the corporate sector finance its cash-flow deficit will result business failures and unemployment that create greater losses for banks on their existing loans.
Indeed, in recent months the markets have lowered their expectations in terms of the growth of European banks’ profits. Low or negative interest rates restrict the unit interest margin banks can obtain. However, from a general equilibrium perspective, they also increase credit, reduce bad debts and raise the value of the financial and real assets banks hold on their balance sheets. As a result, the net aggregate effect on bank profitability in general has so far been positive overall. That said, this effect will foreseeably diminish insofar as the situation of negative interest rates is prolonged over time. Indeed, a positive note regarding the most recent developments in profitability is that net interest income has increased following years of stagnation at low levels. In any event, the decisions adopted by the ECB Governing Council at its meeting on 12 September, including the 10 bp reduction in the deposit facility rate to -0.5%, the resumption of net purchases under its asset purchase programme and the strengthening of forward guidance, have been accompanied by mitigating measures. These include the application of a two-tier system for reserve remuneration, designed precisely to ensure the effectiveness of monetary policy transmission through the bank channel. There is also theoretical and empirical evidence that low interest rates transmit the monetary impulse by encouraging banks and other financial intermediaries to take risks. Fortunately, we currently have various macroprudential policy instruments, which I shall refer to later, designed to mitigate the potential build-up of risks that may affect financial stability through this channel.