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UPDATE 2-Britain's OSB flags potential negative rates portfolio hit

* OSB flags impact from sub-zero interest rate environment

* CEO says -0.75% rate would cause structural damage

* Resumes dividend as lending picks up after COVID-19 hit (Recasts, adds CEO comments)

April 8 (Reuters) - Britain’s OSB became the first lender to flag the potential impact of negative rates on its business Thursday, but its chief executive said he did not see a scenario where savers were charged to hold their cash as likely.

The Bank of England has already cut rates to a historic low of 0.1%, as policy-makers across the world seek to support a swift economic recovery from the coronavirus crisis.

OSB, among a new generation of lenders set up to challenge the dominance of Britain’s centuries-old banking institutions such as Lloyds, said that negative rates were unlikely to have an impact on it until they reached -0.75% or lower.

“Negative interest rates may also impact customer behaviour, with changes in the demand for lending and savings products potentially impacting the Group’s loan book growth plans and liquidity coverage levels,” OSB said in a statement.

While sub-zero rates, which would be the first if implemented since the central bank was founded in 1694, would lower borrowing costs for businesses and households, they would also narrow the lending margin for financial institutions.

“I struggle to see an environment in the UK where organisations will be charging savers to hold their money, because that would just encourage the public to do potentially dangerous things with their money like take it out of the bank and stick it under the mattress,” OSB CEO Andy Golding said.

‘STRUCTURAL DAMAGE’

Golding told Reuters that it was apparent the central bank wanted to investigate whether sub-zero rates were genuinely a fiscal tool or if it would be too problematic to implement.

“If we ended up with negative interest rates in this country, it would be 25 basis points tops. If we went to negative 75 basis points, you would start to do structural damage to how the UK banking system works,” he added.

Speculation of negative rates has intensified after Britain faced its worst economic contraction in three centuries in 2020 and is lagging other major economies in its economic rebound.

Profit dropped 9% for the year, OSB said, despite a pick-up in lending, after a 20 million pound ($27.5 million) provision for a potential third-party fraud.

OSB, which specializes in buy-to-let, commercial mortgages and residential development finance, recommended a final dividend of 14.5 pence after suspending the payout at the peak of the COVID-19 crisis. ($1 = 0.7280 pounds) (Reporting by Chris Thomas and Muvija M in Bengaluru; Editing by Amy Caren Daniel and Alexander Smith)

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