3 Reasons why the end of the ‘term funding scheme’ is a big deal for SMEs

Posted by Francone Fernandes
Posted on May 16, 2018 Leave a comment

Created in August 2016 and closed in March 2018 with some £126Bn loans made during that period. It was designed to help banks and Building societies to get cheap funding and stimulate lending to the economy, following the decision of the BOE to cut rates after the Brexit vote in 2016.

Although the scheme may represent only a small part of banks total funding, particularly the larger ones like Lloyds, Barclays or RBS, it will force banks to look for other types of funding, which is likely to be more expensive.

The direct consequences are three-fold:

1. Lending costs for SME’s are likely to increase to protect the bank’s profit margin

2. Banks will offer better deposit rates to attract more deposits and this will be positive for SME’s with cash position and little return.

3. Banks will turn to wholesale funding (for example, Bond markets). This is not a cheap option as bond prices are going down (and Yield is going up), driven by inflation and current rate increases. This will make lending for SME’s more expensive.

While the overall impact is somewhat minimized by the fact borrowing banks have 4 years to repay outstanding loans, it will impact all new lending activities going forward.

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