The Term Funding Scheme with additional incentives for SMEs (TFSME) was introduced by the Bank of England in March 2020 as a response to economic pressures during the Covid-19 period. It provided four-year term funding to banks and building societies at interest rates at or very close to Bank Rate. Each participating institution was granted a borrowing allowance (initially at least 10% of their stock of real-economy lending), with additional allowances if they increased lending, particularly to small and medium-sized enterprises (SMEs). The goal was to reinforce the pass-through of low interest rates to businesses and households and to incentivize banks to support lending to the real economy, especially SMEs. In essence, the TFSME offered banks a cost-effective source of funding for up to four years, helping them bridge a period of economic disruption and keep credit flowing.
Collateral and Operation of the Scheme
The TFSME was a collateralized funding facility. Participant banks drew loans (or “drawings”) from the Bank of England after pre-positioning eligible collateral to secure those loans. As per the scheme’s terms, any asset acceptable under the Bank’s Sterling Monetary Framework (SMF) could serve as collateral – including high-quality securities and pools of loans – subject to haircuts and the Bank’s approval. Collateral had to be pre-positioned with the Bank in advance of drawing funds. The Bank would value the collateral (applying standard SMF haircuts), and participants could then borrow reserves (central bank cash) up to their allowance against that collateral.
Each TFSME transaction had a fixed term of four years (with possible extensions for certain SME loan programs), though borrowing banks were permitted to repay early. The interest rate on TFSME loans was Bank Rate plus a small scheme fee (the TFSME Fee), meaning the cost of funds stayed low as Bank Rate hovered near historical lows.
Is TFSME Considered a Repo? (Legal vs. Economic Perspective)
A repurchase agreement (repo) is a transaction where one party sells an asset to another with a promise to repurchase it later at a set price. Legally it’s a sale and subsequent repurchase, but economically it behaves like a secured loan of cash with the asset as collateral. In the case of the TFSME, the arrangement is economically very similar to a repo: a bank receives cash (central bank reserves) and provides collateral, with the understanding that after the term (or upon early repayment) the bank will return the cash and recover its collateral. In fact, the Bank of England itself describes TFSME drawdowns as loans – the Bank’s operations guide notes that under TFSME, “loans were offered from April 2020 to October 2021”. External descriptions likewise refer to the TFSME as a “four-year collateralized loan facility”.
Legally, TFSME transactions were conducted under bespoke scheme terms and the SMF framework rather than standard market GMRA repo contracts. The participating bank signed a Scheme Letter and Terms & Conditions with the BoE, and the funding was bilateral between the BoE and the institution. This suggests the legal form was that of a collateralized lending agreement (akin to the BoE’s Discount Window Facility operations) as opposed to an outright sale and repurchase of securities in the market. In other words, the Bank of England held the collateral as security for a loan to the bank, rather than becoming outright owner of the collateral in the interim.
From an economic standpoint, there is little difference – the TFSME achieved the same outcome as a repo: the bank gets secured funding and the central bank is protected by the collateral. The International Capital Market Association (ICMA) notes that even though repos are structured legally as sales and repurchases, their principal use is as secured borrowing and lending of cash. The TFSME fits that description, functioning as a form of secured borrowing from the central bank.
Accounting Treatment and Balance Sheet Implications
From an accounting perspective, the borrowing under TFSME is treated similarly to other forms of secured financing (repos). Banks do not remove (derecognize) the collateral assets from their balance sheets; instead, those assets are flagged as pledged/encumbered to the central bank. The cash received from the BoE is recorded as a liability – essentially a loan payable or deposit from the Bank of England. This grouping indicates that banks classify TFSME funding in the same bucket as repos, covered bonds, and other secured financings. In practice, whether the transaction is legally a repo or a secured loan, the financial statement treatment is the same: the bank shows a liability for the borrowed amount (often under “due to central banks” or “secured funding”) and continues to show the pledged assets on its balance sheet (with a note that they’re pledged as collateral).
On the Bank of England’s balance sheet, TFSME lending appears as an asset (loans to banks) funded by an increase in central bank reserves liabilities. The U.K. national accounts classification for the earlier 2016 Term Funding Scheme (TFS) confirms this treatment: the scheme is recorded as a loan asset held by the central bank vis-à-vis the banks, with a corresponding deposit liability (the newly created reserves) on the BoE’s books. In the case of TFSME (the 2020 scheme), which was implemented on the Bank’s balance sheet, the same logic applied – the TFSME loans increased the asset side of the central bank, while the reserves created increased the liabilities. This means TFSME added to public sector net debt by the value of the reserves created, reflecting its nature as a lending operation.
Summary
TFSME borrowing is legally not a repo transaction, but it is functionally equivalent to a repo-style secured loan. The scheme’s design and documentation point to a collateralized loan structure, and banks record the funding as secured borrowing on their balance sheets (grouped with repos). Legally the mechanics may have been tailored via the Bank’s own documentation, but economically and accounting-wise, TFSME drawings are treated like any other repo or secured loan – the bank gets cash and incurs a secured liability, while its assets remain on balance sheet as encumbered collateral until the loan is repaid. This alignment in treatment ensures that the presence of TFSME funding is clear in balance sheets (as a central bank borrowing) and that banks cannot use the same collateral elsewhere (preventing double-usage of assets for multiple secured loans).