The end of the Bank of England (BoE)’s discounted-rate funding schemes will cost the banks an extra £803m (€925m) in interest expenses, analysts at Moody’s have said.
The rating agency estimated banks will see their net interest margins reduced by around 3 basis points once the BoE ends its Term Funding Scheme (TFS) and Funding for Lending Scheme (FLS), launched in 2016 and 2012 respectively.
The two schemes have been supplying banks with liquid capital at near-base-rate cost, in a measure proportional to total lending on their books.
In November, Chancellor Philip Hammond authorised an extra £25bn for TFS, bringing its total available capital to £140bn. According to Moody’s, total outstanding loans under TFS and FLS stand at £158bn.
Banks that have tapped into the schemes include Virgin Money, Metro, Aldermore, Shawbrook and Paragon.
Following the closure of the schemes, Moody’s expected deposits to make up for around 60% of the shortfall in capital, with the remainder covered by securitisation and bonds.
Its analysts said: “Smaller banks with outstanding TFS and FLS loans and limited access to wholesale markets will face the greatest pressure to increase their deposit rates.
“Some banks may also be able to replace BoE funds with low-interest sight deposits, including current accounts and instant access savings accounts. These currently offer average rates of just 0.46%, below the 0.5% cost of TFS funding.
“However, smaller and medium-sized lenders have previously struggled to expand the current account deposit base due to customer inertia, making it easier for large incumbent players to reduce refinancing costs.”