The end of the Bank of England’s (BoE’s) Term Funding Scheme and its predecessor, the Funding for Lending Scheme, are moderately credit negative for the UK banking sector, says Moody’s Investors Service in a report published today.
Moody’s estimates that the UK banks it rates will see an increase of £803m in the combined interest expense, equivalent to a reduction of around three basis points in their net interest margins, as a result of the closure of the two lending schemes.
“The scheme closures will lead to a slight increase in banks’ interest expenses as they replace cheap loans with costlier deposits and secured funding instruments,” said Aleksander Henskjold, an Analyst at Moody’s.
“The higher interest expense will in turn weigh on their net interest margins.”
UK banks’ market funding as a proportion of tangible banking assets will decline over the next four years as existing Term Funding Scheme (TFS) and Funding for Lending Scheme (FLS) loans are refinanced with deposits and securitized lending.
At the end of February 2018, UK banks had £127bn of outstanding TFS loans, equivalent to 8 per cent of the eligible loan stock, as well as £31bn of FLS loans. Moody’s expects that around 60 per cent of the combined £158bn will be replaced with deposit funding, particularly household deposits.
Moody’s forecasts that banks will replace the remaining 40 per cent of their expiring loans with secured funding.