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Term Funding Scheme receives £25bn cash injection

  • 21/11/2017
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Term Funding Scheme receives £25bn cash injection
Chancellor Philip Hammond has authorised a £25bn increase in the total size of the Asset Purchase Facility (APF) to accommodate further Term Funding Scheme (TFS) lending.

The agreement was revealed in an exchange of letters between Bank of England (BoE) governor Mark Carney and the chancellor published by the BoE. It shows that the TFS is expected to exceed its original £100bn remit, potentially surpassing £115bn.

The TFS was created in August 2016 and allows banks and building societies to borrow from central bank reserves for an extended period at a rate close to bank base rate (BBR). It is intended as a tool to ensure that the historically low BBR is passed through to real economy lending rates faced by households and businesses.

TFS transactions are facilitated by the APF, a tool set up in 2009 to carry out quantitive easing operations and boost economic activity. An indemnity is also provided by the government to cover any losses arising from the facility.

In his letter to the chancellor, Carney noted that the TFS has been “effective at ensuring that the low level of Bank Rate has been passed through to real economy lending rates.”

“Rates on new and existing loans fell after the TFS was launched and have remained low by historical standards,” Carney continued.

“I am requesting that you authorise an increase in the total size of the APF of £25bn to £585bn, in order to accommodate expected usage of the TFS by the end of the drawdown period,” wrote Carney.


£100bn limit

At the time of the TFS launch, it was noted that the total drawings from the scheme would be determined by actual usage – which was expected to reach £100bn.

The APF was increased in August 2016 to £545bn, consistent with £100bn of TFS drawings. It was increased again to a total size of £560bn, consistent with £115bn of TFS drawings.

However, as total drawings reached £91bn by mid-November 2017, Carney said that the BoE now expects the final level of drawings to exceed £115bn.

In his reply, Hammond agreed that the TFS has been effective in passing the low BBR onto the interest rates available to the wider market, and authorised the £25bn injection.

“I note that, in line with requirements in the Monetary Policy Committee remit, the amends to the APF that could affect the allocation of credit and pose risks to the Exchequer have been discussed with treasury officials,” Hammond continued.

“This will ensure that the TFS can continue to lend central bank reserves to banks and building societies at rates close to Bank Rate during a defined drawdown period, which will close at the end of February 2018,” he added.

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