Twilight for the Term Funding Facility
Business lending flows and the machinery of credit, these are docile times for Australian business. And thus the TFF - an RBA carrot for banks - may be going to waste.
If banks broadly do not loosen their risk settings and appetite for business credit this week and this month, a whopping 50 per cent of the Term Funding Facility set up by the RBA in March may not be able to used by the industry.
“A very large $42.5 billion remains undrawn with 25 business days remaining” on the TFF, Peter Sheahan, director of institutional markets at Curve Securities informed clients on Friday.
On 19 March, as part of a landmark package of RBA interventions in the capital market, the central bank set up a scheme designed in part to sustain credit flows to business as much as relieve the private debt capital market from their usual obligation to ensure banks are wisely funded.
In a realm of supremely low interest rates, the TFF credit lines on offer to Aussie banks have turned out to be uncompetitive.
“Short term NCD funding at 0.09 per cent, overnight cash from the RBA at 0.13 per cent and term repo opportunities at 0.18 per cent continue to represent more attractive funding facilities at this time” than the fixed TFF short-term rate of 25 basis points, Sheahan said.
$3.5 billion was drawn last week on the TFF, and the total now stands at $41.5 billion, as Curve’s Sheahan summarised for his clients.
He said the drawdown last week “is exactly the weekly average of the last four weeks of $3.5 billion, but well under the $8.5 billion weekly run rate required to drawdown the whole available,” under the TFF.
While not updated last week, the RBA most recently listed $70.5 billion as the “additional allowance attributed to business lending” by banks.
That was two weeks ago, during the first week of August. Five weeks earlier, on July 1, the RBA put this allowance at $66.4 billion.
These low-key readings on level of the TFF allowance suggest there is little method and less intent by banks, for now anyway, to fully exploit the Term Funding Facility, which is due to begin winding up at the end of September, and taken off the table by the RBA at the end of March 2021.
Those banks seeking to draw whatever they still can from the TFF need to engineer a surge of business lending. While also neglected all this period, chunks of any easy business credit will need to be covered by the SME guarantee scheme rules where possible.
The weekly TFF update confirms a languid demand-side story defines the Australian banking industry this year.
The TFF: might it be renewed and even re-priced? Time for the RBA to tell.