BoE’s Term Funding Scheme nears its close
The way that UK government central funding for UK leasing is changing, Lorenzo Migliorato reports.
February 28 2018 will mark a close for the Bank of England’s Term Funding Scheme (TFS) programme, designed to keep bank lending going as the country’s financial services sector faces an uncertain outcome for Brexit.
The scheme, in the words of the Bank of England (BoE), aimed to help “the transmission of bank rate cuts to those interest rates actually faced by households and companies.” It saw the BoE extending capital at a near-base rate cost – currently 0.50%, among the lowest in decades – with the provision that financial institutions must use it to expand customer lending.
For lenders, this meant a cheaper, quicker-to-access provision of cash than wholesale finance (borrowing from other banks) or using customers’ deposits. The saving, in the intentions of the BoE, would be passed on, making borrowing by consumers and businesses cheaper.
Though initial uptake had been slow, with only one bank borrowing through the scheme in 2016, pace picked up massively in the following year and a half, with challenger banks leading the way. Virgin Money – who only recently expressed the interest to expand into business lending – borrowed a whopping £5bn, trailed by Metro (£1.8bn), Aldermore (£950m), Shawbrook (£510m) and Paragon (£450m).
Demand was so high that BoE governor Mark Carney asked Chancellor Philip Hammond to boost the facility by £25bn, just months before it is due to close. Total size of TFS has subsequently been brought to £140bn, £90bn of which had already been tapped into when Carney asked for the increase.
In the BoE’s view, the scheme has been substantially successful: latest data suggests the cost of borrowing for businesses now stands at 2.4%, while the average rate on a variable rate mortgage is below 2%.
The scheme is only one part of a wider BoE effort – similar to ones by other central banks like the European Central Bank and the Federal Reserve – to stimulate lending by making large quantities of cash available.
The straightforward-named Funding for Lending scheme, for example, was set up in 2012, and made large funds accessible to banks in proportion to the performance of their lending business. Some £43bn had been drawn from the facility as of the BoE’s last update in 2017.