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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.
     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
     "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:
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