LONDON (Reuters) - The Bank of England will allow banks to exclude state-backed small company loans made under Britain's new emergency Bounce Back credit scheme from leverage rules, it said on Monday, removing a possible disincentive for banks to lend.
Banks are expanding lending sharply to help companies stay afloat during the coronavirus pandemic that is sending the economy into deep recession, piling liabilities onto their balance sheets.
"The PRA (Prudential (NYSE:PUK) Regulation Authority) is offering a modification by consent for banks subject to the UK 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 Bank of England said in a statement.
Loans under the Bounce Back scheme pose less of a risk to banks than traditional business loans because they are backed by a state-guarantee.
A bank's leverage ratio measures capital to assets on a non-risk weighted basis.
Excluding Bounce Back loans from the leverage ratio calculation gives banks more headroom to lend more generally before they bump up against the maximum leverage ratio set by regulators.