The Bank of England has introduced a package of measures in response to the COVID-19 crisis aimed at reducing economic harm caused by the pandemic. Measures include:
- reduction of the Bank’s base rate to 0.1%, a record low, to reduce the cost of lending for businesses and households;
- lowering the cost of lending to banks in order to increase bank lending under the Term Funding Scheme with Additional Incentives for Small to Mid-size Enterprises (TFSME);
- launch of the COVID Corporate Financing Facility in collaboration with HM Treasury (for further details, see here; and
- temporary decrease of the regulatory burden on banks and building societies to support additional lending.
In this short update, we focus on the TFSME.
The TFSME aims to stimulate the economy and encourage lending by:
- providing participants (banks and building societies already participating in the Bank of England’s Sterling Monetary Framework (SMF) and which have access to its Discount Window Facility) with a low-cost source of funding; and
- encouraging participants to continue lending to businesses and consumers during the COVID-19 pandemic, in particular by providing additional incentives for participants increasing lending to SMEs.
This will in turn facilitate lenders to pass the reduction in interest rates to businesses and households and support additional lending to SMEs, which face serious challenges due to the crisis.
The Bank of England will do this by offering four-year funding to participants at interest rates at, or very close to, the recently reduced Bank Rate. The scheme opened for drawdowns on 15 April 2020 and will remain open until 30 April 2021, and the term of each transaction will be for four years from the date of drawdown. Eligibility criteria is at the Bank of England’s discretion and institutions not currently participating in the SMF can apply to join subject to this criteria.
As with other Bank of England funding schemes, eligible collateral must be pre-positioned before a drawdown is made, and eligible collateral for the TFSME will be the same as collateral eligible under the terms of the SMF. Interest charged under the TFSME will be equal to the Bank Rate plus a scheme fee. Scheme documentation, including terms and conditions and operating procedures, is available here.
Applications to the TFSME are now open and the team at Shepherd and Wedderburn can assist you with your application to participate. For more information on the TFSME, please click here.