The Term Funding Scheme

Hello readers,

On reading the Economist this week, I came across the concept of the Term funding Scheme.[1] Although I have looked into monetary policy and quantitative easing in some depth, this is a concept that I was relatively unfamiliar with so I have done some research on it and have summarised my findings below.

The term funding scheme was introduced by the Bank of England in August 2016 following the results of the Brexit referendum. Under the scheme the Bank of England planned to lend £100 billion to banks at a generous rate close to the lower bank rate for four years.[2]After the referendum the the Bank of Endland cut the base rate from 0.5% to 0.25%. At such low base rates banks would struggle to offer savers an adequate interest rate and may even have to offer negative interest rates which would lead to customers understandably withdrawing their funds. Cutting the base rate to 0.25% squeezed the margins between what banks paid savers and what they charged borrowers This is also know as the net interest margin ( the gap between the rate at which banks borrow and lend).

The aim of the Term Funding Scheme was to accelerate the speed at which borrowing costs find their way through to the real economy. Mark Carney stated that following the interest rate cut and the term funding scheme that UK banks have “no excuse” to stop lending[3]. After a slow start, with only one bank drawing funding in the third quarter of 2016, the Scheme has seen banks and building societies draw a total of almost £80billion towards the end of 2017. In total 26 building societies registered for the Scheme, of which eleven have so far utilised the facility by the end of 2017. This includes eight of the ten largest societies. Building societies using the Term Funding Scheme have all increased net lending over the period.[4] Due to the success of the scheme, Mark Carney wrote to the Chancellor in August 2017 requesting a £15 billion increase in the scheme [5]. In November 2017 the Bank of England came to an agreement with the treasurery to increase the scheme by a further £25 billion bring the total value of ‘cheap credit ‘avaialbe to the banks to £140 billion.[6]

The Scheme is due to end in February 2018. Banks are less in need of help than they were in mid 2016 and there is overall lower usage of the scheme, and following the increase rate rise in November 2017 to 2018 there is less of a squeeze on banks’ margins.[7] The ability of banks to borrow at a low repayment rate meant banks didn’t need to rely on retail deposits (savers) for funding; hence reducing the need for banks to compete for savers’ cash, putting downward pressure on interest rates for savers. When the scheme closes, banks will need to offer more competitive rates for savers. The longer term impact will be even more significant. Banks have four years to repay money to the scheme, and will increasingly need to rely on savers during this time. As inflation currently is still above the bank of England’s 2% rise further rate rises are likely to follow soon, but as explained above ultimately the end of the term funding scheme may be more important than any future rate rise for savers.

In essense the TFS – or the Term Funding Scheme – was the big policy innovation announced by Mark Carney, governor of the Bank of England today, as part of a three-pronged monetary stimulus launched in the wake of the UK’s Brexit vote. While this is subtly different to the quantitative easing scheme in some senses (under QE the Bank printed money to buy assets; in the TFS it prints money to lend to banks temporarily, taking collateral in exchange), in other senses it is similar.










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