Thread by @andyverity

The Bank of England's Financial Stability report didn't seem to have many headline grabbers. And it didn't if your main concern is - are the banks strong enough to withstand the current twin crises Covid and Brexit? (answer - they can absorb £200bn losses - so probably 'yes'). /1

But there's some shockers in the detail. Whereas big corporates have had plenty of cash, even repaying bank loans or business rate relief, it's a very different story for the small and medium-sized businesses who employ most of the working population. /2

Smaller fims are now in hock to the banks like they've never been before. Lending to UK small and medium-sized enterprises (SMEs) in the year to October was more than 40 times higher than the 2016–19 average. /3

So the risk the BoE is monitoring - that banks run out of cash to lend - is modest. But that's like reassuring people in 1939 that they won't have to worry about trench warfare or in 1914 that there's plenty of cavalry. You're fighting the last war.

You have to read on from the summary to learn that BoE staff estimate UK companies could face a cash-flow deficit in the 2020–21 financial year of up to around £180 billion - in other words £180 billion more cash going out than coming in over the year to next April.

The big corporates built up huge cash reserves over the past decade as prices rose faster than wages (the flip-side of the squeeze in living standards). While some of that cash was given out in dividends and share buybacks, much was kept in reserve..

But many of those SMEs never wanted to borrow cash from banks. Indeed because some of them are outside the banks' "risk appetite" (a perennial problem - you've got a great idea for a business but banks won't back it without security) the banks probably wouldn't have lent them -

- without a) political pressure and b) the 100% guarantee that indemnifies banks against any losses. That raises a serious question. How will the banks treat business customers who will struggle to repay the loans next year, when the economy still won't be fully recovered?

Given that banks will soon again be allowed to pay dividends to shareholders and bonuses to senior managers, they and their shareholders are in a position to profit when Bouncebank Loans are repaid just fine - but won't cop any losses if they default.

That creates a worrying incentive. Banks, or insolvency practitioners and/or receivers that work for them, may work out that it's more profitable, or better for their cost of capital, to 'rely on their security' - in other words, pull the loan and seize the assets backing them.

That's at least as worrying for our economic chances of a decent recovery as the banks' capacity to lend new money. The risk is that tens of thousands of viable businesses have the rug pulled from under them just as they're trying to get back on their feet.

If you don't think banks would behave so cynically, I have three letters for you. GRG. RBS's global restructuring group did exactly that from 2009-2014, with devastating consequences for owners. Oh - and Lloyds's ironically titled 'business support unit'.

While at the Financial Services Authority, the now Bank of England governor Andrew Bailey refused to publish a report, later leaked, that showed more than 90% of GRG customers had suffered some form of mistreatment. When it leaked his response was to try and hunt the leaker.

The FSA's defence of this was that it couldn't publish the report because it was against the law (it being an investigation under section 166 of the Financial Services and Markets Act). MPs argued it was in a form that conserved customer confidentiality and published it.

What SMEs need to know from all this - as does anyone concerned with the economic recovery - is how will we make sure that banks don't foreclose on their security for the wrong reasons again?

Many SMEs that were perfectly viable and profitable before Covid may struggle, in an economy not expected to recovery fully for two years, to repay a Bounceback Loan they never wanted to take out in the first place.

If the government and regulators allow banks to treat SMEs struggling to repay Bounceback Loans as if they were normal delinquent borrowers in normal times, it will be ignoring something important...

If the government and regulators allow banks to treat those in default as if they were normal delinquent borrowers, or worse - as with GRG - to treat firms like that even when they're keeping up their repayments, they'll be overlooking something serious.

Namely that most firms only borrowed in the first place because they were prevented from making a living by government policy. And it's government policy that tells them to 'borrow their way through it' - to manage the consequences of its own anti-virus policies.

While some businesses won't be viable any more after Covid, many others will be. The risk is that many good businesses are again knocked over, with all the consequences for unemployment, for the sake of the banks' self-interests.

Because all this has happened as a direct result of intentional government policy, that arguably creates a new moral responsibility. If you deprive people of the chance to make a living, some would say, then it's down to you to ensure that doesn't ruin them.