Much has been written about taxpayer funding deals for certain companies provided by the A$90 billion JobKeeper scheme. Their earnings come from grants given to them to offset anticipated losses from COVID-19 — with no obligation to repay that money when the losses did not occur.
Australian banks may have reaped a similar (albeit much smaller) windfall via the Reserve Bank Term Funding Facility (TFF).
This loan program gave banks A$188 billion at extraordinarily cheap interest rates to help them “support their customers and help the economy through difficult times”.
But it appears that this cheap money has given the three biggest banks – Commonwealth Bank, National Australia Bank and ANZ Bank – the chance to enrich their shareholders through funding. share buybacks rather than repaying cheap loans.
There would be nothing wrong with share buybacks if the effective subsidy built into cheap Reserve Bank loans, worth hundreds of millions of dollars a year, had been passed on to the intended recipients – the borrowers , especially commercial borrowers. But it is far from clear.
Let me explain.
Operation of the Term Funding Facility
The Reserve Bank of Australia (RBA) introduced the Term Financing Facility in March 2020. It offered to lend to each bank, at a cheap interest rate, an initial amount (a “general allowance”) equal to 3% of the bank’s outstanding loans at that date.
An “additional deduction” 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 growth).
Banks borrowed A$84 billion in September 2020. The RBA then put a further A$57 billion of general provisions on the table. By the time it ended the program in June 2021, the RBA had lent banks A$188 billion. Of this amount, A$40-50 billion was “additional allocations” for the expansion of business lending.
The RBA initially offered these loans at a three-year fixed rate of 0.25%, equal to its overnight rate target. In November 2020, it lowered the interest rate on new advances to 0.1%, in line with the reduction in its cash and three-year bond rate target.
This was well below the cost of banks’ funds from other sources, so it was subsidized funding from the RBA – and ultimately the taxpayer. For example, if the RBA had instead purchased bonds issued by banks in the capital market, it would have earned a higher rate of return, thereby increasing its profits. This, in turn, would have helped reduce the government’s budget deficit and the need for taxpayers’ money to fund that deficit.
Have commercial borrowers benefited?
My rough estimate of the value of the interest subsidy, supposed to be passed on by banks to commercial borrowers via lower-cost loans, is A$500-600 million a year for three years. This estimate is based on comparing the cost of financing three-year debt by banks on the capital market with the TFF rate.
The big four banks – ANZ, Commonwealth, NAB and Westpac – got around 70%.
If the banks entirely passed on this subsidy to whom it was supposed to help – businesses needing cash to stay afloat or grow – there would be nothing to consider here. But the meager publicly available evidence does not suggest that they did.
Interest rates charged to corporate borrowers have come down since February 2020, but not much more than one would have expected given the general decline in interest rates. With the introduction of the federal government loan guarantee scheme for small and medium-sized businesses, one would have expected a much larger rate cut for these borrowers.
It is also debatable whether cheap RBA funding has prompted more lending. Overall, the statistics show that business loans have been flat since the start of 2020, with virtually no growth in outstanding loans for small, medium or large businesses.
But that doesn’t mean the Term Funding Facility didn’t have an effect. What kind of decline might have occurred in the absence of support is anyone’s guess.
That said, it is a fact that banks have taken the opportunity to expand their most profitable line of business, home loans. The TFF’s cheap money was not necessary for this to happen, as evidenced by the banks’ huge liquid assets, but it might have helped.
Meanwhile, bank profitability has rebounded since the start of 2020, when banks had to build up provisions for possible bad debts, which are now being written off.
Stock buybacks are no longer a good idea
All of this means that banks have been left with excess liquidity. What to do: use this money to reduce borrowing (including TFF loans) or return funds to shareholders by buying back shares?
The big banks seem to opt for the latter, spending up to 15 billion Australian dollars on share buybacks over the next year.
Share buybacks can be done in a number of ways, but all essentially involve buying back shares upon issue, held by investors, in exchange for cash. They are the way to maximize profits to dispose of excess funds, increasing the value of shares by reducing their number.
But if the banks have the money to do this and keep some of the grant from the TFF’s cheap finance, the most socially responsible thing to do would be to first pay back the cheap money the RBA gave them. lent to “help the economy”.
There should be enough transparency about the effects of the TFF for the public to be convinced that the RBA has not actually subsidized shareholder profits. In the absence of clear evidence, big bank share buybacks do not bode well and raise similar questions to those regarding JobKeeper’s “rorts”.