By Kevin Davis
Much has been written about those funded by the taxpayer Strokes of luck for some companies provided by the JobKeeper program for A $ 90 billion. Their profits come from grants made to offset their forecast COVID-19 losses – with no obligation to repay that money if the losses have not occurred.
Australian banks may have a similar (albeit much smaller) profit over the reserve bank Term Financing Facilityy (TFF).
This loan program gave banks A $ 188 billion at exceptionally low interest rates to help them “support their customers and help the economy through a troubled time.”
But it seems that this cheap money has given the three largest banks – Commonwealth Bank, National Australia Bank, and ANZ Bank – the opportunity to add funding to their shareholders Share buybacks instead of paying back the cheap loans.
There would be nothing wrong with the share buybacks if the effective subsidy built into the Reserve Bank’s cheap loans, valued at hundreds of millions of dollars a year, were passed on to the intended recipients – borrowers, especially corporate borrowers. But that is far from clear.
Let me explain.
This is how the Term Funding Facility worked
The Reserve Bank of Australia (RBA) introduced the Term Funding Facility in March 2020. She offered each bank an initial amount (a “General Allowance”) equal to 3% of the bank’s outstanding loans as of that date at a low interest rate.
An “additional allowance” was available when a bank expanded its lending to businesses, particularly small businesses (which had an additional A $ 5 for every A $ 1 loan growth).
As of September 2020, banks raised A $ 84 billion. The RBA then put another A $ 57 billion in general allowances on the table. By the end of the program in June 2021, the RBA had lent the banks A $ 188 billion. Of this, A $ 40-50 billion was “additional allowances” for extended business loans.
The RBA initially offered these loans at a fixed three-year interest rate of 0.25%, which was in line with its overnight rate target. In November 2020, she lowered the interest rate on new loans to 0.1%, which is the same as lowering her interest rate on cash and three-year bonds.
This was well below the banks’ cost of funding from other sources, so it was subsidized funding from the RBA – and ultimately from the taxpayer. For example, if the RBA had bought bank bonds on the capital market instead, it would have generated higher returns and increased its profits. This in turn would have helped reduce the government’s budget deficit and the need for taxpayers’ money to finance that deficit.
Has it benefited commercial borrowers?
My basic estimate of the value of the interest subsidies that are supposed to flow through the banks through lower-cost loans to business borrowers is A $ 500 to $ 600 million a year for three years. This estimate is based on a comparison of the costs of three-year debt financing by the banks from the capital market with the TFF rate.
The four big banks – ANZ, Commonwealth, NAB, and Westpac – got about 70% of that.
If banks passed that subsidy on in full to those they were supposed to help – companies that need cash to stay afloat or to expand – there would be nothing to worry about here. But the sparse publicly available evidence does not give them confidence.
Interest rates for commercial borrowers have fallen since February 2020, but not much more than would have been expected given the general decline in interest rates. With the introduction of the federal loan guarantee scheme for small and medium-sized companies, a significantly more pronounced fall in interest rates for these borrowers would have been expected.
Whether the cheap RBA financing has led to more lending is also questionable. Overall, the statistics show that corporate lending has stagnated since the beginning of 2020, with the outstanding loans for small, medium or large companies practically not growing.
But that doesn’t mean the TFF has had no effect. It is unclear what kind of decline could have occurred without support measures.
However, the fact is that banks have seized the opportunity to grow their most profitable business, housing lending. The cheap TFF money was not necessary for this, as the huge liquidity stocks of the banks show, but it could have helped.
In the meantime, the profitability of the banks has recovered from the beginning of 2020, when the banks had to set up provisions for possible bad debts, which are now being released.
Share buybacks are not looking good now
All of this means that the banks have run out of excess cash. What to do: use that money to reduce borrowings (including TFF loans) or return money to shareholders by buying back shares in them?
The big banks appear to be going for the latter, spending up to A $ 15 billion on share buybacks over the next year.
Share buybacks can be done in a number of ways, but all of them essentially involve buying back issued shares held by investors for cash. They are the profit-maximizing way to dispose of excess funds by increasing the value of stocks by reducing their number.
But if banks have the money to do it and keep some of the subsidies from cheap TFF funding, it would be more socially responsible to first pay back the cheap money the RBA lent them to “help the economy.”
There should be enough transparency about the impact of the TFF so that the public can be assured that the RBA was not effectively subsidizing shareholders’ profits. Without clear evidence, the big banks’ share buybacks don’t look good and raise questions similar to those of the JobKeeper “rorts”.
Kevin Davis, Professor Emeritus of Finance, The University of Melbourne This article is republished by The conversation under a Creative Commons license. read this original article.