The RBA’s Term Funding Facility, intended to foster “Support for Business Credit”, to quote the sub-head from the governor’s landmark speech in mid-March, seems to be missing the mark.
Or banks, as the beneficiaries of this cheap as chips funding, are in the same bind as early on in every downturn: supply and demand for credit are tepid. In 2020 amid the Covid pandemic, credit conditions are bleak.
“SMEs generally aren’t looking for credit,” industry analyst Neil Slonim (“the Bank Doctor”) told Banking Day yesterday, in an echo of comments by Australian Industry Group CEO Innes Willox reported last Monday.
“I’m not sure whether this is because they believe (correctly) that banks either don’t want to lend, or are taking too long to make a decision, or the SMEs just don’t want to take on any more debt.
“Evidence of this is the $40 billion SME Loan Guarantee Scheme which has seen banks lend $1.65 billion and non-banks lend about $100 million,” Slonim said.
The TFF facility was pitched to the market, the industry and the people as a cornerstone intervention to support businesses and the economy across the first six months of the pandemic. RBA governor Philip Lowe explained in March that under the TFF facility, banks and other ADIs “will have access to at least $90 billion in funding”.
There’s not much need for it.
Peter Sheahan, director of institutional markets at Curve Securities, in a weekly appraisal on Friday of the latest RBA data on the Term Funding Facility points out that “a very modest $512 million was drawn this week and a total of $15.9 billion is now outstanding”.
This represents less than a fifth of the funding prop offered banks four months ago.
Sheahan told Curve’s clients: “There are 11 weeks remaining to drawdown the outstanding initial allocations of $66 billion before the program terminates on 30 September.
“It is really hard to see a drawdown profile of $6 billion per week given the plentiful supply of available funding, the low credit growth aggregates and the speed of asset amortisation, notwithstanding the large volume of repayment holidays being extended across the client base.
“Liquidity remains elevated and the bias is for term deposit pricing and credit spreads to trend lower,” Sheahan444 said.
Over the last 10 weeks, the value of the “Additional Allowance attributed to growth in lending to small and medium enterprises” – a component of the TFF formula –increased from $9.3 billion to $19 billion.
This allowance, under the RBA’s formula, is “five times the dollar increase in SME Credit outstanding over the TFF reporting window”.
This implies around $2 billion in credit flow to SMEs across the entire Australian banking industry over 10 weeks, which looks lame.
ABS lending date released on Thursday shows new loan commitments for “small business” over April and May of $4.75 billion, and for “medium businesses” over those two months of $9 billion.
The TFF has a deeper purpose than support for business credit; mitigating the presumed anxiety confronting bank and credit union treasuries as they manage the rollover or replacement of wholesale funding lines over the six months covered by the facility.
In a speech two weeks ago, Guy Debelle, the RBA’s deputy governor, said “together with the liquidity provided through market operations and the TFF, this has lowered the cost of funding for the banking system.
“In turn, this has been transmitted through to lower borrowing costs for households and businesses.
“We expect increased drawings in the coming months as banks use the TFF funds to replace maturing wholesale funding.
“The strong growth in deposits has reduced the immediate need for TFF funding. Some of that deposit growth was likely temporary as businesses drew on precautionary lines of credit and placed the funds drawn on deposit at a bank.
“And we have seen some of this reverse since April. But some of the increase in deposits is likely to be more long-lasting,” Debelle said.