Britain’s biggest banks are facing a deadline to repay more than £100bn of pandemic-era loans, which experts say could benefit savers as banks and building societies compete for customers with attractive rates in a “messy” dash for cash.
More than 70 lenders ranging from high street banks and building societies such as HSBC and Nationwide to digital and specialist lenders such as Starling Bank and Aldermore collectively borrowed £193bn from the Bank of England as part of an emergency programme rolled out in the early days of the Covid-19 pandemic in 2020.
The Term Funding Scheme for Small and Medium-Sized Enterprises (TFSME), which predated the government’s bounce back loan programme, was meant to incentivise banks to keep lending to small businesses amid growing economic uncertainty. It boosted bank balance sheets at minimal cost, having been tied to the Bank of England’s base rate, which was cut to an all-time low of 0.1%.
The central bank is now demanding that lenders repay their debts, with £100bn of the remaining £153bn worth of loans falling due over the next 18 months. It means banks have to quickly decide how they will repay – or replace – billions of pounds’ worth of TFSME funding without leaving big holes in their balance sheets.
Banks such as Barclays or Lloyds, which are the biggest borrowers with about £18bn and £30bn outstanding, respectively, say they will either dip into existing cash pools or are confident they could borrow at relatively low rates.
But smaller lenders will have to take a more expensive route by tapping wholesale markets, where they borrow from another financial institution; opting for securitisation, where they bundle customer loans and sell off slices to investors on the open market; or attracting fresh deposits from new and existing savings customers with enticing rates and deals.
Regardless of which path banks choose, the sudden surge in demand will force banks to compete for funding, either from investors or savers.
“It is highly likely that some banks will either look to replace [TFSME] with [more expensive] market-based wholesale funding or by competing more aggressively for deposits,” HSBC’s banking analyst Robin Down said in a research note. “Could this spill over into a renewed bout of deposit competition later this year? We think it’s entirely possible.”
While that is good news for savers, particularly when the Bank of England is starting to cut interest rates, it will put pressure on bank balance sheets and net interest margins, which are the difference between what is earned from loan charges versus what is paid to savers – a key measure of profitability for lenders.
This point has not been lost on the Bank of England, which warned that replacing TFSME funding could prove a challenge, particularly at a time when the central bank is trying to sell off its own pile of bonds in the open market.
“Taken together, these trends will affect sources of bank funding and could affect their cost,” the central bank said in its financial stability report in June.
Other lenders such as Metro Bank are trying to avoid the flurry of competition and selling off assets to foot the bill. The lender, which borrowed £3bn in TFSME funding, announced last month it was selling a £2.5bn mortgage book to NatWest to help settle its tab.
While it also aligned with Metro’s new strategy to move out of standard residential mortgages, its chief executive, Daniel Frumkin, said it was a way to avoid a costly dash for cash that was likely to hurt profitability.
“There’s a lot of TFSME outstanding – I mean a lot … and at some point banks are going to need to be able to find liquidity to repay it,” Frumkin said.
“I think competition on rate for deposits over the next 18 months is only going to increase … [and] that’s expensive. Margins will be impacted, profitability will be impacted,” he added.
“So we would prefer to be on the sidelines during what we think is going to be very messy 2025, 2026, 2027, as people raise money to repay TFSME.”
