The Term Funding Scheme: design, operation and impact

Quarterly Bulletin 2018 Q4
Published on 21 December 2018

By Bianca Ginelli Nardi and Chukwuma Nwankwo of the Bank’s Markets Directorate and Jack Meaning of the Bank’s Monetary Analysis Directorate.

  • In August 2016 the Bank of England’s Monetary Policy Committee announced a package of measures, with mutually reinforcing elements, to support growth and return inflation to target. The measures included a Term Funding Scheme (TFS), which provided funding to participating banks and building societies at interest rates close to Bank Rate.
  • The design of the TFS reflected its primary objective which was to reinforce the pass‑through of the August 2016 cut in Bank Rate to the interest rates faced by households and businesses, against a backdrop where Bank Rate was close to zero.
  • The Scheme appears to have achieved its primary objective with evidence suggesting that the reduction in Bank Rate was passed on to lower lending rates on loans such as mortgages, without significant compression in lenders’ net interest margins or the supply of credit to the economy.

Overview

The Term Funding Scheme (TFS) was part of a comprehensive package of easing measures announced by the Monetary Policy Committee in August 2016. The aim of the package — which also included a 25 basis point reduction in Bank Rate to 0.25% and an expansion of asset purchases of £70 billion — was to provide additional support to growth and achieve a sustainable return of inflation to the 2% target.

The primary objective of the TFS was to reinforce the pass‑through of the August 2016 cut in Bank Rate to the interest rates faced by households and companies, allowing the reduction from 0.5% to 0.25% to have broadly the same impact as cuts made when rates were further from zero.

The design of the Scheme reflected this primary objective and it was calibrated so that the reduction in Bank Rate could have a broadly neutral impact on lenders’ margins in aggregate.

Under the TFS, participating banks and building societies were able to borrow funds from the Bank of England at a rate close to Bank Rate for up to four years. The Scheme closed to new lending in February 2018, as envisaged when it was introduced, having made £127 billion of loans.

Quantitative and qualitative evidence, including feedback from participants, suggests that the primary objective of the Scheme was achieved. Observations from the period after the TFS was launched suggest that the reduction in Bank Rate was passed through to lower lending rates on loans such as mortgages, without any significant compression in lenders’ net interest margins, or in the supply of credit to the economy.

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