The Reserve Bank is confident Australian banks are well placed to continue issuing in volatile global bond markets, given the strength of their balance sheets, and that it will not have to delay repayment of Term Funding Facility loans.
Banks are due to start repaying their TFF borrowings next month and will be looking to replace much of that funding with wholesale funding.
RBA assistant governor Christopher Kent said banks have been issuing more long-term bonds in what had been relatively favourable conditions in global bond markets.
Speaking at the KangaNews DCM Summit yesterday, Kent said: “Our liaison with the banks suggests they are planning for further issuance of bonds as they prepare for the roll-off of the first tranche of the TFF.”
Conditions in global bond markets have become difficult following the failures of Silicon Valley Bank and Credit Suisse.
Kent said: “Banks are already well advanced on their bond issuance plans for the year and could defer their bond issuance for a while. Even if markets remain strained for a time, Australian banks’ issuance will continue to benefit from the strength of their balance sheets.”
The TFF was launched in March 2020, initially giving banks access to three-year funding at a cost of 25 basis points. The initial allowance was 3 per cent of each bank’s total credit outstanding.
In September 2020 the program was expanded with a supplementary allowance for each bank and in November the rate was lowered to 10 bps. The total allowance was equivalent to 4 per cent of their non-equity finding or 6 per cent of their total credit.
Banks used the facility to borrow A$188 billion – 88 per cent of the total funding available under the terms of the program. Ninety-two of the 133 eligible banks accessed the TFF.
Banks are due to repay $76 billion of their TFF borrowings between April and September this year.
Kent said banks will use some of their balances held in their exchange settlement accounts at the RBA to repay the loans.
Kent said it was too early to say whether the TFF repayment schedule would need to be extended in the face of global bond market disruption, saying banks “are in a good position to issue bonds”.
Repayment of the TFF borrowings will also have an impact on banks’ liquidity positions. Kent said that as banks run down their exchange settlement balances to repay TFF loans, they will need to obtain high-quality liquid assets.
“They could also source more of their funding in products like term deposits to reduce the amount of liquid assets they need to hold.”