The Term Funding Scheme (TFS) was introduced in August 2016 and indemnified by HM Treasury as part of the Bank of England’s (Bank’s) Asset Purchase Facility (APF), which also included the Corporate Bond Purchase Scheme (CBPS) (£10 billion) and gilt purchases (£435 billion). The TFS provided funding to banks and building societies at a rate close to bank rate for a term of up to four years. This supported the transmission of the August 2016 cut in bank rate to lending rates faced by households and businesses. The maximum authorised size of the TFS was £140 billion, and the actual size of the scheme when the drawdown window closed on 28 February 2018 was £127 billion.
In view of the scale of potential losses on TFS holdings relative to the Bank’s level of loss-absorbing capital at the time, the HM Treasury indemnity over the APF was extended to include all assets held under the TFS. The increased indemnity was duly notified to the chairs of the Treasury Committee and Public Accounts Committee on 4 August 2016, and a full departmental minute was laid on 15 September 2016. The most recent increase in the APF indemnity, following the increase in the authorised limit for the TFS to £140 billion, was notified to Parliament by laying a full departmental minute on 20 November 2017.
Under the new Finance Memorandum of Understanding (MoU), which was agreed in June 2018 between the Bank and HM Treasury and notified to Parliament on 21 June 2018, it was agreed that HM Treasury would provide a £1.2 billion capital injection to the Bank, bringing its total loss-absorbing capital to £3.5 billion. This additional capital would allow the TFS to move from the Treasury-indemnified APF to the Bank’s un-indemnified balance sheet, and would result in the end of the Treasury’s £140 billion contingent liability with respect to potential losses in the TFS.
The Bank received the £1.2 billion capital injection on 22 March 2019 with the result that the TFS has now transferred to the Bank’s un-indemnified balance sheet. At the moment the capital injection was transferred, HM Treasury also notified the Bank that the £140 billion contingent liability associated with the TFS portion of the APF had been extinguished. The risks associated with any gains or losses on TFS holdings will now be managed against the Bank’s augmented loss-absorbing capital.
HM Treasury will continue to monitor risks to the Bank’s overall capital and financial position (including the TFS) through regular meetings with the Bank as set out in the new Finance MoU. The enhanced risk control framework previously agreed with the Treasury with respect to the remaining Treasury-indemnified APF schemes (gilt purchases and the Corporate Bond Purchase Scheme) will remain in place.
A full departmental minute is laid in the House of Commons providing more detail on this contingent liability.