The BoE is consulting with lenders to see what preparations they need to make if the central bank were to cut interest rates to negative levels to help an economy hit by the COVID-19 pandemic.

BoE Governor Andrew Bailey has stressed that no decision has been taken on negative rates, but bankers told lawmakers on Monday such a policy would be costly, distracting and may not even work well.

Lenders in Britain make the bulk of their profits on the difference between the rates charged on lending and paid out on deposits and are concerned margins will be further squeezed by sub-zero rates.

"I do think the (BoE's) Monetary Policy Committee does have to carefully consider whether negative interest rates have the desired outcomes," Amanda Murphy, head of commercial banking at HSBC UK, told parliament's Treasury Select Committee.

"Where we see places where they have already been introduced, Europe, Japan, Switzerland, we haven't seen inflation rise and the growth hasn't come back as strongly as one might have hoped," she added.

"We have a programme underway to get ourselves ready, we are not ready to date to be able to deal with negative interest rates. There is considerable cost associated with that that we put into the system to enable us to do that," Murphy said.

Susan Allen, chief executive for retail and business banking at Santander UK, said the bank's legacy systems were not ready for negative interest rates.

"That programme to adapt those systems would realistically be expected to take somewhere in the region of 12 to maybe 18 months to deliver," Allen said.

David Oldfield, CEO of Lloyds Commercial Banking, said preparations for implementing negative rates were not a trivial matter.

"It's a tool in the Bank of England toolbox and it's not clear at this stage quite how they are going to deploy this range of tools over time," Oldfield said.

Starling Bank CEO Anne Boden said negative rates would not have the impact that people expect.

"We already charge negative interest rates on our euro accounts for sums above 50,000 so our systems are ready," Boden said.

Asked about fraud concerns on more than 42 billion pounds worth of COVID emergency loans granted by the industry to small businesses, Lloyds' Oldfield said the rate of fraud on its own loans was about five times normal levels, but still less than 1%.

(Reporting by Huw Jones and Iain Withers; Editing by Richard Chang)

By Huw Jones and Iain Withers