MNI POLICY: Debt, Stability Bars To BOE Funding Scheme Rebirth

By David Robinson

     LONDON (MNI) - The Bank of England must overcome both financial stability

and political hurdles if it wants to re-start its Term Funding Scheme (TFS) as

part of any stimulus package that launched in response to Brexit developments

and the global slowdown, MNI has been told.

     Bank analysis has shown that the TFS worked well in delivering stimulus

when needed, but outside experts say re-launching it would drive up public debt

levels and risk leaving some lenders reliant on cheap central bank funding. The

Monetary Policy Committee decides whether to deploy the TFS, but assessments of

its suitability as a policy tool will be wider ranging.

     The TFS, a cut-price lending scheme to ensure rate cuts were fully passed

on, was part of the August 2016 post-Brexit vote stimulus package. The BOE's

analysis concluded that the scheme, which offered four year funding at close to

Bank Rate, was successful as mortgage and other loan rates decreased without

squeezing lenders' margins or restricting the supply of credit.

     Analysis from Deloitte, the consultancy firm, warned that some lenders

would struggle with the rates they would have to pay in comparison to the

ultra-cheap TFS if it is wound down, resulting in slowing  balance sheet growth,

and re-launching it would only postpone facing up to the problem, Gareth Read, a

Senior Manager in Banking and Capital Markets Advisory at Deloitte, told MNI.

     From a political perspective, a difficulty with the TFS is that it has a

hefty impact on debt levels. TFS lending is accounted for as debt in the public

finances and total TFS loans amounted to stg127 billion by the time it was

closed to new lending in February 2018. The repayment of these loans, with the

first bulky repayments due in September 2020, will help to lower debt-to-GDP but

this benefit would be lost if the loans were rolled over or new TFS lending

launched.

     Former Chancellor Philip Hammond's fiscal rules included a target for debt

to fall as a share of GDP in 2020/21, a goal which was, probably not

coincidentally, made easier to attain by the repayment profiles for the TFS.

Under electoral and Brexit pressures, these fiscal rules could be thrown out but

TFS repayments would make it easier for any Chancellor who was increasing

spending to claim debt was on the down path. Extending the TFS also carries

risks for the BOE.

     "The other key thing about the TFS and QE is that they have increased the

gearing of the Bank of England balance sheet significantly. That increases risk

at a time when policymakers would like risk to be lower," Martin Wheatcroft,

Advisor to the Institute of Chartered Accountants on public finances, said.

     The Bank repeatedly stresses its independence, but political sensitivities

do matter -- maybe not in assessing whether stimulus is needed, but certainly in

how to deliver it. While any decision on whether to restart TFS could fall to

current Governor Mark Carney, who is set to leave in January 2020, ideally from

the policymakers' perspective his successor would also be on board with whatever

decision is taken.

     Kate Barker, a former MPC member and currently on the interviewing panel to

select Carney's successor, stressed recently the importance of a Governor, who

understood that the "credibility of policy is best served by being politically

sensitive."

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

[TOPICS: M$B$$$,M$E$$$,MT$$$$,M$$BE$]