MNI INTERVIEW: Bean Warns Of BOE Term Funding Scheme Addiction

By David Robinson

     LONDON (MNI) - Investors should not assume the Bank of England would

automatically reactivate its bank funding vehicle, the Term Funding Scheme, were

it to cut its policy rate close to its lower bound, Charles Bean, a top official

at the Office for Budget Responsibility and former Bank of England Deputy

Governor, told MNI in an interview.

     While MNI has reported that the BOE would be likely to resurrect the TFS to

enhance the effectiveness of interest rate cuts in response to a No-Deal Brexit,

Bean said that it would be dangerous to encourage commercial lenders to depend

on cheap central bank funding.

     "The problem if you get into a world where the TFS is routinely in

operation at very large scale is, basically, instead of the market, depositors,

bank debt holders, being the people who provide bank finance ... you are relying

on an agent of the state, the central bank, to do it," Bean said.

     "It may be something you want to do in emergencies but I don't think we

want financial markets where ... the funds that are provided to the banks are

mainly routed through the central bank," he said.

     In August 2016 following the vote to leave the European Union the BOE

reduced Bank Rate to 0.25% and launched the TFS, to ensure that the rate cut was

passed on to households and business.

     --TIED TO LENDING

     As UK banks typically pay a positive rate of interest on bank accounts and

do not charge for them, their margins would be squeezed if they cut lending

rates in line with a very low Bank Rate. Term funding, provided for up to four

years so long as banks maintained their net lending, was cheap enough to ensure

providing credit remained profitable.

     TFS drawings between August 2016 and February 2018 totalled STG127 billion.

As the loans were underwritten by the Treasury, they added to government debt, a

burden which is now being reduced as they are repaid, with TFS accounting for

2.2 percentage points of a projected decline in the UK's net-public-debt-to-GDP

ratio of 3.2% of GDP in 2020-21.

     This presents an additional danger, Bean said, noting that if TFS usage

became routine politicians could start to think about alternative uses for the

funds.

     "I certainly wouldn't have thought that it just became de rigueur every

time that you have got rates approaching the zero lower bound and into negative

territory that you necessarily reactivate the TFS," he said.

     The BOE's only published work on the TFS found that it achieved its goals

but Bean said it was tricky to assess its impact.

     "I wouldn't say it wasn't a success. It is just a question of how do you

measure the success," he said.

     Take up was bound to be high because banks would always take the cheap

funding and comparing the marginal pass through from the reduction in Bank Rate

to lending rates when the TFS was deployed with a similar cut when interest

rates were high would not clearly show what would have happened if the TFS had

not been used, in Bean's view.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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