Term Funding Scheme with additional incentives for SMEs (TFSME) – Market Notice

1. When interest rates are low, it is likely to be difficult for some banks and building societies to reduce deposit rates much further, which in turn could limit their ability to cut their lending rates.  In order to mitigate these pressures and maximise the effectiveness of monetary policy, the TFSME will, over the next 12 months, offer four-year funding of at least 10% of participants’ stock of real economy lending at interest rates at, or very close to, Bank Rate. Additional funding will be available for banks that increase lending, especially to small and medium-sized enterprises (SMEs).  

2. The TFSME will: 

• help reinforce the transmission of the reduction in Bank Rate to the real economy to ensure that businesses and households benefit from the MPC’s actions;
• provide participants with a cost-effective source of funding to support additional lending to the real economy, providing insurance against adverse conditions in bank funding markets;
• incentivise banks to provide credit to businesses and households to bridge through a period of economic disruption;  and
• provide additional incentives for banks to support lending to SMEs that typically bear the brunt of contractions in the supply of credit during periods of heightened risk aversion and economic downturns.  

3. This Market Notice sets out the main features of the TFSME and how it will operate. Further documentation, including an application form, Terms and Conditions, and Operating Procedures will be made available via the Bank’s website in mid-March 2020.

Eligibility

4. Institutions eligible to participate in the TFSME will be banks and building societies that are participants in the Bank of England’s Sterling Monetary Framework (SMF) and that are signed up to access the Discount Window Facility (DWF). This represents a broad range of participants that are already operationally ready to participate in the TFSME. 

5. SMF participants that are not already signed up to the DWF can apply for access alongside applying to use the TFSME. Institutions that are not currently SMF participants can apply to join, subject to the Bank’s usual eligibility criteria.

6. Applications to join the TFSME can be made from mid-March 2020 when further documentation will be made available on the Bank’s website. Institutions will be required to sign a Scheme Letter (and may be required to sign other documentation) to become a Participant.

7. Eligibility and continued access to the TFSME will also be dependent upon a Participant and other members of its “TFSME Group” (as defined in paragraph 17 below) acting, in the opinion of the Bank, in good faith and in a manner consistent with the objectives of the TFSME. The eligibility criteria, which may be varied at the Bank’s discretion, are set out in the Operating Procedures and the Terms and Conditions, as published on the Bank’s website.

Drawdowns

8. Drawdowns under the TFSME may be undertaken on each business day during the Drawdown Period which will open no later than 27 April 2020, and which will run until 30 April 2021.  Drawdown requests should be made to the Bank’s Sterling Markets Desk, as set out in the Operating Procedures. 

Term of the transactions

9. The term of each transaction will be for 4 years from the date of drawdown. Participants in a TFSME Group that contains one or more accredited lenders under the British Business Bank’s Bounce Back Loan Scheme (BBLS) will be able to extend the term of some transactions to align with the term of loans made through the BBLS. As set out further in the Operating Procedures this will initially involve extending TFSME drawings from 4 to 6 years and subsequently from 6 to 10 years, subject to amounts of outstanding BBLS lending.

10. Participants may terminate any transaction, in part or in full, before its maturity date, in accordance with the Operating Procedures.

Eligible collateral

11. Eligible collateral will consist of all collateral currently eligible in the SMF: level A, B and C collateral sets (including loan pools). The Bank reserves the right to reject any collateral offered for any reason at any time.

12. Eligible collateral must be pre-positioned in advance of a drawing.

13. The Bank’s valuation of collateral will be binding. Haircuts will apply to collateral as set out in the SMF. Haircuts may be varied at any time at the Bank’s discretion.

Data reporting and certification

14. Participants will be required to provide “Net Lending data” (Non-SME Net Lending and Net Lending to SMEs, as defined in Paragraphs 20 and 21) for each entity in the TFSME Group, in a form specified by the Bank. Participants must submit Net Lending data on a quarterly basis. Data must always be based on end-calendar quarter data and be submitted before a fixed deadline as specified in the Operating Procedures.

15. Participants will need to provide data on lending to UK resident households, private non-financial corporations (PNFCs) and certain non-bank credit providers (NBCPs). For lending to UK resident households, the amount which is to unincorporated businesses (UBs) will need to be disaggregated. For lending to PNFCs, the amount will need to be disaggregated into “SMEs” and “Large Corporates”. 

• SMEs are defined here as: PNFCs with an annual debit turnover of less than £25 million on the business account; or UBs.
• UBs are defined as unincorporated businesses resident in the UK (eg sole traders). Lending to UBs should not include buy to let lending.
• Certain NBCPs are defined as UK resident “financial leasing corporations”, “factoring corporations” and “mortgage and housing credit corporations (excluding SPVs related to securitisation)”.
• Large Corporates are defined as PNFCs with an annual debit turnover of greater than or equal to £25 million on the business account. 

16. The Bank reserves the right to require independent audits of the data provided to the Bank at any time. The Bank will require Participants to provide an independent audit report on the accuracy of the data provided to the Bank for the TFSME. The Bank will confirm details of audit requirements in due course.

Lending measure

17. The quantity and price of funding available from the TFSME will be based on the quantity of sterling loans made by a Participant’s TFSME Group to UK resident: households, PNFCs and NBCPs outside of the Participant’s TFSME Group.

• A Participant’s TFSME Group is defined as all “Monetary Financial Institutions” (as defined below) and Specialist Mortgage Lenders within a Group (as defined in the Terms and Conditions) as well as NBCPs which are part of the Participant’s broader Group, as determined by the Bank.
• If a Participant is a “ring-fenced body” as defined in Part 9B of the Financial Services and Markets Act 2000, any other member of the Participant’s TFSME Group must also be a ring-fenced body.
• If a Participant is not a ring-fenced body, but is part of a Group containing ring-fenced bodies, then any other member of its TFSME Group must also not be a ring-fenced body.
• Monetary Financial Institutions means the subsector defined in the Classification of Accounts Guide paragraph Part III.2 (in conformity with paragraph 2.75 of the European System of Accounts, known as ESA2010). 

18. TFSME Group lending will be monitored during a “Reference Period” running from 31 December 2019 to 31 December 2020. The Reference Period is designed to ensure that Participants may generate Additional Allowances (as defined in paragraph 22) immediately from the point at which the Scheme is announced, without waiting for the Drawdown Period to open.  For each TFSME Group, a Base Stock of Applicable Loans will be determined by the Bank based on a certification by the TFSME Group of reported data as at end-December 2019.  If a Participant wishes to draw on the Scheme on the first day of the Drawdown Period, data must be submitted no later than 1 April 2020.  Data will be processed as the Bank receives it and will be prioritised by order of submission.

19. The “Base Stock” of Applicable Loans will be determined at the start of the Reference Period and defined as loans made by a Participant’s TFSME Group to UK resident: households, PNFCs and NBCPs outside of the Participant’s TFSME Group. “Applicable loans” will be defined as loans made by a Participant’s TFSME Group to UK resident: households, PNFCs and NBCPs outside of the Participant’s TFSME Group.

20. For each TFSME Group, “Non-SME Net Lending" during the Reference Period will be defined as new applicable loans net of repayments, excluding loans to SMEs, since 31 December 2019 which have been certified by the TFSME Group.

21. For each TFSME Group, “Net Lending to SMEs" during the Reference Period will be defined as new applicable loans net of repayments to SMEs since 31 December 2019 which have been certified by the TFSME Group, as set out further in the Operating Procedures.

Borrowing allowance

22. Participants in a TFSME Group may draw in aggregate up to the “Borrowing Allowance” for the TFSME Group. The Borrowing Allowance for each TFSME Group is equal to the “Initial Allowance” plus the “Additional Allowance”.

23. The Additional Allowance is equal to the sum of the following, subject to the points below:

(i) one times Non-SME Net Lending over the Reference Period to UK resident: households (excluding UBs), Large Corporates, and NBCPs that are not part of the TFSME Group; and
(ii) five times Net Lending to SMEs over the Reference Period

24. This means that:

• If a TFSME Group’s Non-SME Net Lending amount is negative at any time, its Additional Allowance is equal to five times Net Lending to SMEs. 
• If a TFSME Group’s Net Lending to SMEs amount is negative at any time, its Additional Allowance is equal to one times Non-SME Net Lending.
• If a TFSME Group’s Net Lending to SMEs and Non-SME Net Lending are both negative at any time, then the Additional Allowance is zero. 

In all cases, the Initial Allowance remains at 10% of Base Stock.

25. If the outstanding aggregate drawings of Participants in a TFSME Group exceed the TFSME Group’s most recent Borrowing Allowance (for example, if a TFSME Group’s Borrowing Allowance has fallen following a reduction in Net Lending to SMEs, but Participants in the TFSME Group have drawn up to the maximum amount of a previous higher Borrowing Allowance), no further drawings will be permitted until the Borrowing Allowance has increased above the aggregate drawing amount. Any such ‘excess’ drawings will not be clawed back, but this will affect the fee, as set out in Paragraph 31. 

26. Participants in the Term Funding Scheme (TFS) launched by the Bank in 2016 will be permitted to repay TFS drawings and redraw in the TFSME, subject to having sufficient Borrowing Allowance in the TFSME. 

27. When applying to join the TFSME, participants must provide the Bank with a plan outlining expected usage of the TFSME, including identifying where refinancing of TFS drawings will take place. Participants should expect to discuss their drawdown and repayment plans with their PRA supervisors as part of normal supervisory oversight and to continue to follow prudent risk management standards regarding credit underwriting, funding and liquidity, and levels of asset encumbrance (in line with CP24/19).

Interest

28. The Bank will charge interest on TFSME transactions equal to Bank Rate plus a Scheme fee (TFSME Fee).

29. Interest will be calculated daily based on Bank Rate and the outstanding drawings by Participants in a TFSME Group. The interest will be allocated between Participants in a TFSME Group in proportion to the Participants’ drawings.

30. The TFSME Fee will be determined at the end of the Reference Period, based on total Net Lending (the sum of Non-SME Net Lending and Net Lending to SMEs) over the Reference Period. For TFSME Groups whose Net Lending over the Reference Period as a whole is positive, the fee will be 0bp per annum. For TFSME Groups whose Net Lending over the Reference Period as a whole is negative, the fee will increase linearly (to the nearest basis point) from 0bp per annum if lending is unchanged up to 25bp per annum if lending falls by 5%. If lending falls by more than 5%, the fee will be 25bp per annum.

31. The fee will apply daily to all drawings by Participants in a TFSME Group, up to the Borrowing Allowance on that day, for the duration of the drawings. Excess drawings above the Borrowing Allowance will be charged at 150bps per annum.

Interest payments

32. During the Drawdown Period, Participants will accrue interest based on Bank Rate and an initial flat fee of 0bp per annum on their drawings, each calendar quarter in arrears. Any additional fee required on drawings during the Drawdown Period, including any fee for excess drawings or for negative net lending, will be charged as a lump sum after the end of the Drawdown Period. After the end of the Drawdown Period, interest will be charged quarterly in arrears.

Published information

33. The Bank intends to publish the size of each Participants’ outstanding drawings, and each TFSME Group’s Base Stock and Net Lending data, quarterly with a lag on a timetable to be announced in due course. Details of aggregate TFSME drawings will also be published weekly on the Bank’s website. By participating in the TFSME, Participants agree to the Bank publishing this information.

Other SMF operations

34. In addition to providing 4-year funding through the TFSME, the Bank continues to offer liquidity via its other facilities, including regular Indexed Long-Term Repo and short-term non-sterling liquidity facilities as set out in the Bank of England Market Operations Guide. Eligible participants may use these facilities in addition to drawing from the TFSME.