The BoE and UK government have responded to the Covid-19 crisis with a broad range of measures. These were announced swiftly, but some have taken quite a while to implement, particularly when it comes to financial support for private sector companies.

These measures share the feature of relying heavily on the country's banking sector, which is in solid shape despite facing the same challenges as banks in other European countries.

All this is taking place against the background of Brexit and the government's refusal to extend the transition period on the basis that this would increase uncertainty for businesses and could reduce the flexibility they will need to react to the health crisis.

 

The banking channel is the preferred channel for supporting the financing of SMEs

TFSME designed to support lending to SMEs

Announced on 11 March, the Term Funding Scheme for Small and Medium-sized Enterprises (TFSME) has been operational since 15 April and is likely to remain open until 30 April 2021. It is designed to support the supply of lending to small and medium-sized enterprises (SMEs) through a four-year refinancing programme for banks and other lenders at preferential rates.

In practice, the BoE intends to meet demand for TFSME through daily refinancing lines charged at the discount rate plus a premium (see below). Interest will be calculated daily as a function of the discount rate and outstanding drawdowns. It will be split between participating Monetary Financial Institutions (MFIs) in proportion to their drawdowns. Fees will be determined at the end of the reference period (which runs from 31 December 2019 to 31 December 2020) on the basis of net lending (the sum of net lending to SMEs and net lending to non-SMEs over the reference period). The fee will be zero for MFIs whose net lending increases over the reference period. It will then increase linearly to 25bp for MFIs whose lending has fallen by a maximum of 5% over the reference period, but could exceed this 25bp level for those whose lending has fallen by more.

 

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