Bank of England TFSME: Structure and Repo Considerations

By James Bowpitt — published 2025-12-31, last updated 2025-12-31.

TFSME Structure and Purpose 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 and in return had to provide eligible collateral to secure those loans. According to the scheme’s terms, any asset acceptable under the Bank’s Sterling Monetary Framework (SMF) could serve as collateral – including high-quality securities and even 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 banks were permitted to repay early if desired. The interest rate on TFSME loans was Bank Rate plus a small scheme fee (the TFSME Fee), meaning the cost of funds stayed very low as Bank Rate hovered near historical lows. In summary, participating banks received cheap four-year funding from the BoE while their pledged collateral remained encumbered (set aside as security) for the term of the loan. 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. However, 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 a…

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Source references include the Bank of England PRA, the European Banking Authority, and the Basel Committee on Banking Supervision.