Examining UK financial stability during the coronavirus pandemic outbreak
Author: Dr Fergus Cumming, Alex Brazier, Matt Waldron (Bank of England)
Date: May 2020
Analysis using data held within the ONS Secure Research Service by the Bank of England examined how UK financial stability was being affected by pandemic. This provided crucial evidence to support HM Treasury’s development of coronavirus (Covid-19) business support packages. Through extensive econometric modelling, the research explored how businesses would be impacted by Covid-19-related financial disruption and made a key contribution to informing eligibility for the schemes to ensure appropriateness for businesses of different sizes.
The biannual Bank of England Financial Stability Reports summarise the performance of the UK financial system. This involves identifying, monitoring, and taking action to remove or reduce systematic risks to protect and enhance the resilience of the UK financial system. The outbreak of the Covid-19 pandemic significantly disrupted the financial landscape and this interim report provided insights for policymakers at a time of extreme economic uncertainty. Furthermore, by providing granular corporate analysis, this research was fundamental in helping the UK government design support schemes that met the needs of UK businesses.
Multiple data sources were used to build understanding of the challenges faced by UK businesses. Bank of England researchers constructed a dataset of around 85,000 UK companies, combining information from company filings via S&P Capital IQ and Companies House filings accessed via Fame (Bureau van Dijk). The ONS Business Structure Database was compared with this sample and provided additional data on small businesses.
The Business Structure Database is an annual extract of the Inter-Department Business Register, a database of business organisations which first began in 1997. Any organisation registered for VAT or which pays a minimum of one member of staff through the Pay As You Earn tax system is present on the register. As one of the largest sources of data about UK businesses, the dataset is estimated to cover 99% of the UK economic activity.
Providing statistics on turnover, employment, industry classification and industry activity, the Business Structure Database offers researchers a large sample of observations about UK businesses. A longitudinal dataset of the Business Structure Database covering 1997 to 2013 is also available, which is frequently linked with other business surveys to increase depth of understanding and provide additional insights.
Researchers used corporate balance sheets to predict the “cash-flow shock” (sudden change in cash flow) to the corporate sector, employing modelling on a huge scale. Cash-flow deficits created by “turnover shock” (sudden change in turnover) were estimated for each company by producing a proxy estimate of ‘free cash flow’. Business accounting data were used to estimate the effect of the pandemic on profits and cash flows in the coming financial quarters. Modelling the impact of several fiscal policy scenarios on UK businesses allowed Bank of England researchers to demonstrate the effects of corporate support packages on the UK economy. Business Structure Database data was used to ensure smaller businesses (which account for a large proportion of UK employment) were correctly represented in the Bank of England’s modelling.
The Bank of England estimated that, without fiscal policy changes, there would have been a £188 billion cash-flow deficit in the financial year ending 2021. This demonstrated the importance of providing credit to businesses to help them survive the pandemic. The report also found that continued lending by the banking system was essential to minimise longer-term economic damage and emphasised that without adequate credit provision, more businesses would fail. This would trigger larger losses for banks on their existing corporate loans. Additionally, by pushing unemployment higher, banks would also experience bigger losses on existing household loans.
This research has informed internal and external emergency policy measures in response to an evolving pandemic. It used granular corporate analysis which was fundamental to helping parts of government design corporate support schemes. The research indirectly impacted other support schemes such as the Covid Corporate Financing Facility for larger firms and the Coronavirus Business Interruption Scheme for smaller firms. This informed HM Treasury decision making, prior to their ‘bounce back loans’ announcement, which offered loans of up to £50,000 for the smallest businesses affected by Covid-19. As of the 21 March 2021, loans to the value of £76.31 billion have been approved by the UK government, with ‘bounce back loans’ accounting for the majority of this sum (61%).
The analysis enabled the Financial Policy Committee to deliver its primary objective of contributing to financial stability during the pandemic. Covered widely in the UK media, the Bank of England interim report was referenced in Treasury Committee oral evidence meetings to gain an understanding of the economic impacts of Covid-19.
Publications and reports
- Bank of England report, May 2020: Interim Financial Stability Report
- Bank of England report, May 2020: Monetary Policy Report
- Bank of England article, May 2020: Technical annex
Blogs, news posts, and videos
- Bank of England blog, June 2020: How will the Covid-19 shock affect the cash flows of UK companies?
- BBC article, May 2020: Are Britain’s banks strong enough for coronavirus?
- BBC article, May 2020: Bank of England warns of sharpest recession on record
- The Guardian article, May 2020: UK unemployment to double and economy to shrink by 14%, warns Bank of England
- Sky News article, May 2020: Government eyes further emergency scheme to aid SMEs
- The Financial Times article, May 2020: More than 100,000 apply for ‘bounce’ back loans
- UK Finance blog, May 2020: Interim Financial Stability Report
- Treasury Committee oral evidence, May 2020:Economic impact of coronavirus, HC271
Presentations and awards
- Bank of England press conference, May 2020: Monetary Policy Report and interim Financial Stability Report
- Commended, ONS Research Excellence Awards 2020
About the ONS Secure Research Service
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