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Law360, London (May 5, 2020, 5:02 PM BST) -- The Bank of England has said that banks can exclude loans to small businesses that are backed by the government from calculations on the amount that they can lend, as part of the U.K.'s economic response to the coronavirus pandemic.
The Prudential Regulation Authority, the central bank's regulatory arm, said Monday that banks do not have to include so-called bounce back loans in their leverage ratio calculations. The ratio is the amount of regulatory capital an institution holds divided by its total assets, a measure of its ability to withstand a financial shock.
"The PRA is offering a modification by consent for banks subject to the U.K. leverage ratio part of the PRA rulebook to exclude loans under this scheme from the leverage ratio total exposure measure, if they choose to do so," the authority said Monday.
The new business loans allow small companies to borrow up to £50,000 ($62,000) amid the COVID-19 pandemic. The amounts are less risky for banks to lend as they are guaranteed by the British government.
Removing the bounce back initiative from the leverage ratio calculation means banks are not limited on the number of these loans they hand out. It will also mean that banks can continue lending to other parts of the economy as the bounce back loans will not eat into their maximum leverage ratio, which is set by regulators.
The government-backed loans, which companies have been able to apply for since Monday, are aimed at small businesses and sole traders. Small companies are able to borrow 25% of their turnover, up to £50,000, with the loans being 100% guaranteed by the state. The loans will also be interest-free for the first year.
Lenders have agreed to a flat rate of 2.5% interest on the loans after 12 months. The bounce back scheme is the latest step in a package of business interruption measures launched by Chancellor Rishi Sunak.
The business interruption loan scheme was announced on March 17 and offered loans of up to £5 million for businesses with turnover of £45 million or less. That was later extended to other, larger companies, which could secure loans of up to £25 million, while businesses with turnover of more than £250 million could gain loans of up to £50 million.
HM Treasury said Monday that £7.5 million has already been awarded to businesses in grants.
--Additional reporting by Martin Croucher. Editing by Alyssa Miller.
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