Non-bank lenders and recently licenced ADIs are calling on the Reserve Bank to launch an urgent review into the allocation criteria for its A$200 billion Term Funding Facility, arguing it has dramatically altered residential mortgage flows in favour of the major banks.
All APRA-licenced deposit takers are allowed to drawdown up to five per cent of their loan books under the facility’s rules – a criterion that earmarks most of the cheap funding to the country’s big banks – ANZ, CBA, Westpac and NAB.
Banking Day understands that non-banks have sought meetings with federal government ministers and Treasury officials as part of their efforts to get the TFF allocation rules reworked.
They believe the major banks are now ‘weaponizing’ a taxpayer-funded support measure against their businesses.
At an online conference held by the Australian Securitisation Forum on Tuesday, RBA assistant governor Chris Kent defended the TFF against claims from conference participants that it was helping to generate market share gains for the major banks.
In responses to questions from conference participants, Kent said the amount of funding under the program was “modest” and was only having an impact “at the margin”.
“I would put it in perspective by saying the amount of funding is modest,” he told the conference.
“It has an effect at the margin.
“There has always been a gap in the funding costs for ADIs and non-ADIs.
“I don’t think the gap has opened up as a result of our actions.”
Kent’s comments triggered a strong reaction on Wednesday from small lenders who argue the RBA has underestimated the TFF’s impact on competition in the mortgage market.
Firstmac chief financial officer James Austin said he suspected Kent had not anticipated the barrage of questions he got on the TFF issue at the ASF conference.
“We are confident the RBA, on reflection, would concur with our observations,” he said.
“The banks have used the TFF funding to offer large cash backs to consumers switching home loans, but are only offering this on fixed rate loans where the borrower is locked in for the equivalent period of the subsidised TFF funding.
“These offers are not applicable to variable rate loans and banks have not passed on any of the savings in terms of cheaper variable rate loans.”
Austin took issue with the assistant governor’s argument that the impact of the facility had been marginal, saying that Firstmac was expecting to lose one third of its home loan book to the major banks if the allocation criteria were not changed.
“Whilst five per cent of total funding may be a small amount, the increase from zero to five per cent in a very short period has an overwhelming impact on prime mortgage markets.
“If left unaddressed, Firstmac will lose one third of its balance sheet by the time the TFF program is concluded.
“That is not ‘marginal’ to us.”
Robert Bell, the chief executive of neobank 86 400 said he wants the RBA to re-set the allocation cap for new market entrants at $200 million rather than 5 per cent of a startup’s loan book.
“While fully supportive of the scheme and its intent, the RBA allocation methodology should not be based on how big you were a year ago,” he said.
“Otherwise, it simply supports the more entrenched participants over smaller new players, which I don’t believe was the intention.”
Volt Bank chief Steve Weston said the TFF was delivering a clear funding advantage to incumbent banks with existing mortgage books.
“The market is seeing record levels of refinancing and a larger than usual proportion of that locking in the record low fixed rates offered by the major banks with access to the TFF,” he said.
“Smaller ADIs such as Volt will find it challenging to provide the competition needed for a financial services industry which will serve households over the long term, without a level playing field in terms of funding.”
Mortgage flow data published by Australia’s largest mortgage aggregator – AFG – appears to support Weston’s claim.
AFG’s data on loan applications lodged by its broking network reveals a sharp recovery in the combined home loan market share of the major banks’ in the June quarter - the period in which the majors made their initial TFF drawdowns.
According to AFG, major banks accounted for more than 66 per cent of loan applications in the June quarter – their highest aggregate market share in three years.
Michael Starkey, a co-founder of Athena Home Loans said he believed the TFF had delivered macroeconomic benefits to the financial system, but is adamant that the facility’s rules are creating unintended consequences for non-banks.
He took issue with the RBA’s assessment that the TFF’s impact on non-bank lenders had been marginal.
“The RBA have argued that even though they are giving banks funding at much lower costs, the TFF is too small to impact their average cost of funds,” he said.
“However, the TFF is $200 billion, which represents more than half the annual volume of mortgages written.
“In the current market dynamic banks are using the TFF to dominate the refinance and purchase market through ultra-low fixed rate offers.
“The TFF subsidy on marginal funding is certainly translating to a huge competitive advantage.”