Bank of England warned lenders end of £127bn cheap funding scheme posed 'systemic risk'

The Bank of England closed its Term Funding Scheme in February - Bloomberg

The Bank of England has privately warned lenders that the withdrawal of its £127bn cheap funding scheme poses a “systemic risk” to Britain’s financial system.

The Term Funding Scheme (TFS) was launched by Bank Governor Mark Carney after the Brexit vote to help keep interest rates low in the real economy, with most lenders gorging themselves on the available funds.

Ahead of the fund closing in February, Bank officials are understood to have warned lender executives at a private seminar in December that turning the taps off posed a “systemic risk”.

The biggest users were Lloyds, RBS and Nationwide, which drew down £19.9bn, £19bn and £17bn respectively.

Lloyds Bank borrowed the most central bank funding at £19.9bn - it has to be paid back over the next four years Credit: Washington Imaging / Alamy

Several challenger banks also helped themselves to large sums relative to their size, such as Virgin Money at £6.4bn. The sums have to be paid back over four years.

The TFS drawdowns represent a small part of banks’ total funding requirements, but lenders that used it will now have to make up for the shortfall by finding funds from other sources, which is likely to be more expensive.

Credit agency Moody’s estimated last week that UK banks will have to pay an additional £800m in interest rate costs following the end of TFS.

The Bank of England declined to comment on the seminar discussions.

The closure of TFS – along with the Bank’s recent and mooted further rate rises – put upward pressure on rates for consumers, leading to more expensive mortgages but more attractive savings accounts.