Much has been written about the windfall benefits funded by taxpayers to some of the companies provided by the A$90 billion Jobkeeper plan. Their profit came from a grant given to them to cover anticipated COVID-19 losses – there was no obligation to pay back that money when the loss was not done.
Banks in Australia may have achieved a similar (albeit much smaller) windfall through the Reserve Bank’s Term Funding Facility (TFF).
The loan scheme gave $188 billion at exceptionally affordable interest rates to help banks “support their customers and help the economy through difficult periods.”
But this cheap money appears to have given the three largest banks – Commonwealth Bank, National Australia Bank and ANZ Bank – the opportunity to enrich their shareholders through share buybacks rather than repaying cheap loans.
There would be nothing wrong with share buybacks if the effective subsidies built into the Reserve Bank’s cheap loans, amounting to hundreds of millions of dollars a year, were passed through to the intended recipients – borrowers, especially business borrowers. But it is far from clear.
Let me explain
How the term funding facility worked
The Reserve Bank of Australia (RBA) launched the term funding facility in March 2020. It offered each bank to lend an initial amount (“ordinary allowance”) equal to 3% of the bank’s outstanding loans, at a cheap interest rate. that date.
An “extra allowance” was available if a bank increased its lending to businesses, especially small businesses (where an additional A$5 was available for every A$1 loan increase).
Banks borrowed A$84 billion as of September 2020. The RBA then placed a general allowance of A$57 billion on the table. By the time the scheme was terminated in June 2021, the RBA had extended $188 billion in loans to banks. Of this, $40-50 billion was “additional allowances” for extended trade lending.
The RBA initially offered these loans at a fixed three-year rate of 0.25%, equivalent to its overnight cash rate target. In November 2020, it cut interest rate on fresh advances by 0.1%, in line with cuts in its cash and three-year bond rate targets.
This was well below the banks’ cost of funds from other sources, so it amounted to subsidized funding from the RBA – and ultimately the taxpayer. For example, if the RBA had instead bought bonds issued by banks in the capital markets, it would have earned a higher rate of profit, which would have increased its profits. This in turn would have helped reduce the government budget deficit and the need for tax dollars to meet that deficit.
Read more: More than rate cut: Behind RBI’s three-point plan
Did traders profit?
My ballpark estimate of the value of the interest rate subsidy, flowing through banks to low-cost lending to business borrowers, is A$500-A$600 million a year for three years. The estimate is based on a comparison of the cost of three-year debt financing by banks from the capital markets with the TFF rate.
The four big banks – ANZ, Commonwealth, NAB and Westpac – got around 70% of it.
If banks had intended this subsidy solely to help – businesses needing cash to grow or expand – then there would be nothing to consider here. But publicly available evidence does not rely on what they believe.
Interest rates charged to commercial borrowers have declined since February 2020, but will not be higher than expected given the general fall in interest rates. With the introduction of the federal government’s credit guarantee scheme for small and medium-sized enterprises, a much steeper drop in rates for those borrowers could be expected.
Whether cheaper RBA funding has prompted more lending is also questionable. Overall, the figures show that business credit has remained stagnant since the beginning of 2020, with virtually no increase in outstanding loans to small, medium or large businesses.
But that doesn’t mean TFF hasn’t had any effect. No one has any idea what kind of decline would have happened in the absence of support measures.
Read more: Vital Signs: The RBA is not a law in itself – an external review would be good for it
That said, it is a fact that banks have taken the opportunity to develop their most profitable line of activity, lending for housing. Cheap TFF money wasn’t necessary for this to happen, as evidenced by the banks’ vast liquid asset holdings, but it could have helped.
Meanwhile, the bank’s profitability has bounced back from early 2020, when banks had to make provisions for potentially bad loans, which are now being reversed.
Share buyback is no longer a good look
This means that the surplus cash with the banks has run out. What to do: Use that money to reduce borrowing (including the TFF loan) or return the money to shareholders by buying back shares?
Major banks opt for the latter, spending up to $15 billion on share buybacks the following year.
Share buybacks can be done in a number of ways, but all essentially involve the repurchase of shares on an issue held by investors in exchange for cash. They are a profit-maximizing method of disposing of surplus funds, increasing the value of shares by reducing their number.
But if banks have the cash to do so, and retain some of the subsidies from cheap TFF funding, a more socially accountable thing to do would be to first pay them cheap money to “help the economy”. did.
Read more: Small businesses are short of funds: Here’s how to make their loans cheaper
There must be sufficient transparency about the effects of TFF to the public to assure that the RBA has not effectively subsidized profits for shareholders. With no clear evidence, share buybacks from big banks aren’t a good look, and raise similar questions about JobKeeper.