By Kevin Davis
Much has been written about taxpayer-funded funds deals for some businesses provided by the A $ 90 billion JobKeeper program. Their gains come from grants given to them to offset expected losses from COVID-19 – with no obligation to repay that money when the losses have not occurred.
Australian banks may have reaped a similar (albeit much smaller) windfall through the Reserve Bank Term financing facilityYes (TFF).
This loan program has provided banks with A $ 188 billion at extraordinarily low 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 opportunity to enrich their shareholders with financing. share buybacks rather than paying off cheap loans.
There would be nothing wrong with share buybacks if the actual grant embedded in the Reserve Bank’s cheap loans, worth hundreds of millions of dollars a year, were passed on to the intended recipients – the borrowers. , especially commercial borrowers. But it is far from clear.
Let me explain.
Operation of the term financing mechanism
The Reserve Bank of Australia (RBA) introduced the term financing facility in March 2020. It proposed to lend each bank, at a cheap interest rate, an initial amount (a âgeneral allowanceâ) equal to 3% of the bank’s outstanding loans at that date.
An âextra allowanceâ was available if a bank increased its lending to businesses, especially small businesses (where an additional A $ 5 was available for every A $ 1 credit increase).
Banks borrowed A $ 84 billion in September 2020. The RBA then put an additional A $ 57 billion in general provisions on the table. By the time it ended the program in June 2021, the RBA had loaned banks A $ 188 billion. Of this amount, A $ 40 billion to A $ 50 billion was “additional allowances” for the expansion of business loans.
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 drop in its three-year cash and bond rate target.
This was much lower than the cost of funds for banks 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 market, it would have obtained 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 finance that deficit.
Have the borrowing companies benefited from it?
My rough estimate of the value of the interest rate subsidy, intended to flow through banks to commercial borrowers via lower cost loans, is AU $ 500-600 million per year for three years. This estimate is based on comparing the cost of financing the three-year debt by banks in the capital market with the TFF rate.
The big four banks – ANZ, Commonwealth, NAB and Westpac – got about 70%.
If the banks were to shift this subsidy entirely to whom it was intended to help – businesses needing cash to stay afloat or grow – there would be nothing to consider here. But the meager publicly available evidence gives no confidence that they did.
Interest rates charged to corporate borrowers have fallen since February 2020, but not much more than one would expect given the general drop in interest rates. With the introduction of the federal government loan guarantee system for small and medium-sized businesses, one would have expected a much larger rate cut for these borrowers.
It is also questionable whether the RBA’s cheap financing has prompted more loans. Overall, statistics show that business loans have stagnated since the start of 2020, with virtually no growth in outstanding loans for small, medium or large businesses.
But that doesn’t mean TFF didn’t have an effect. What kind of decline could have occurred in the absence of supportive measures is an enigma.
That said, it is a fact that the banks took the opportunity to develop their most profitable business, home loans. Cheap TFF money was not necessary for this to happen, as evidenced by the banks’ huge cash holdings, but it could have helped.
In the meantime, bank profitability rebounded from early 2020, when banks had to set aside provisions for possible bad debts, which are now being canceled.
Stock buybacks now are not a good idea
All of this means that the banks have ended up 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 AU $ 15 billion on share repurchases during the following year.
Share buybacks can be done in a number of ways, but all essentially involve buying back shares at issue, held by investors, in exchange for cash. They are the means of maximizing profit to dispose of surplus funds, increasing the value of stocks by reducing their number.
But if the banks have the liquidity to do so and keep some of the TFF’s cheap financing grants, the most socially responsible thing to do would be to first repay the cheap money the RBA loaned them for. “Help the economy”.
There should be enough transparency about the effects of TFF for the public to be convinced that the RBA has not actually subsidized shareholder profits. In the absence of clear evidence, the share buybacks of the big banks do not bode well and raise questions similar to those concerning the ârortsâ of JobKeeper.