A third of the UK’s small businesses are classed as highly indebted, more than double since before the Covid-19 pandemic, the Bank of England said on Friday as it warned of a likely rise in company collapses by the end of the year.
The escalating levels of debt among small and medium-sized enterprises (SMEs) were revealed in a report published by the BoE alongside its quarterly financial stability update. The analysis warned of the potential fallout from higher risk-taking in some markets and urged banks to take a “cautious and prudent approach” to digital assets such as cryptocurrency.
The central bank said SMEs, many of which had not previously borrowed and some of which would not have met pre-pandemic lending criteria, accounted for two-thirds of the £79bn increase in UK corporate debt between the end of 2019 and the first quarter of 2021 as lockdowns left them fearing for their future.
The research showed 33 per cent of SMEs held debt levels of more than 10 times their cash balances, versus 14 per cent before Covid-19 hit. The percentage of those with high debt relative to both cash balances and monthly inflows trebled to 10 per cent from 3 per cent over the same period.
“Although debt appears affordable in the near term, insolvencies are likely to rise from 2021 Q4 as government support is withdrawn as planned,” the BoE’s Financial Policy Committee said, noting that high arrears did not pose a “significant risk” to the UK’s well-capitalised banking sector.
The UK’s furlough scheme to support employees expired at the end of September while the most generous government support loans, known as “Bounce Back Loans”, were replaced in March with the Recovery Loan Scheme.
The BoE described the risks to the financial sector from rapidly growing crypto asset markets as “limited”, but added that regulation needed to be developed quickly to address possible future instability.
Leveraged-loan markets were also singled out for concern, with the BoE citing them as an area where global investors were taking “higher levels of risk”.
“Risks in leveraged-loan markets globally continue to build,” the BoE said. “There are signs of continued loosening in underwriting standards and increased risk-taking in some investment banking businesses.”
The European Central Bank warned last summer that it would take “supervisory actions” against banks that were taking too much risk with leveraged loans.
The BoE also updated financial institutions on its plans to tighten rules on the use of cloud computing platforms from technology companies, such as Amazon, Microsoft and Google, to hold their data.
The central bank is considering “additional policy measures” to curb the risks of these arrangements, including “an appropriate framework to designate certain third-party service providers as critical; resilience standards; and resilience testing”.
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