Simon Hills, Director, Prudential Policy, UK Finance
I was slightly surprised by media speculation this weekend that the ending of the Term Funding Scheme (TFS) poses a ‘systemic risk’ to the UK economy.
The TFS and its predecessor the Funding for Lending Scheme (FLS), closed at the end of February 2018, with a total of £127 billion being drawn.
Banks large and small have used the schemes which were put in place to ‘reinforce the transmission of Bank Rate cuts to households and businesses by providing term funding to banks at close to the Bank Rate’. Challenger and specialist banks have drawn about a quarter of the total outstandings, with the majority of the £127bn being used by the larger systemically important U.K. banks. But by far the largest proportion of banks’ funding comes from customer deposits. In my view, describing the closure of the TFS as a systemic risk is over-egging the pudding. If the regulators believed it poses a systemic risk, I am quite sure that the Financial Policy Committee (FPC) would already have identified this publicly, which it has not.
But of course it is right for regulators and supervisors to be interested in how banks are planning to refinance their term funding drawdowns over the next four years – all banks’ borrowing under the scheme must be repaid by the end of Q1 of 2022. This may create longer term funding cost pressures on business models as net interest margins – the difference between the cost of borrowing and the return a bank makes on its lending – narrow.
I expect that those banks with more than 10 per cent or 15 per cent of their funding coming from TFS will be ensuring that their supervisor has a good understanding of where replacement funds are going to come from.
And there is a good range of options. As well as choosing to attract shorter deposit funding from retail depositors or businesses, banks can also tap the wholesale capital markets to raise replacement longer-term funding from institutional investors. The recent issue by Nationwide of €1billion of senior non-preferred notes and Close Brothers’ plans to issue under a €1bn medium term note programme are both examples of investor appetite for UK financial institutions’ debt instruments.
So banks and their supervisors are looking closely at the funding and business model impacts of the withdrawal of the TFS, but its closure has been known about since last summer and has hardly come as a shock that could create a systemic risk. Labelling it as such seems unnecessary.