Assessing the efficacy of the TFF
The Reserve Bank of Australia (RBA) introduced its term-funding facility (TFF) to support credit provision in the local economy by underwriting bank funding at a low, fixed rate. Strategists say the facility has worked – but its planned June withdrawal may be coming too soon.
PLANK I think it has worked very well. The unstated key aspect is the competitiveness it brought to lending via a level playing field for all banks. This has been a powerful force at the front end of the curve and for the pricing of mortgages. We will see whether the timing of its removal is right. I was surprised that the RBA is prepared to dump it completely in June – I thought it might be tapered in some way.
CROMPTON The nature of the banks’ use of the TFF has been interesting, in that they have only taken down funding at the end of availability periods to preserve options in the near term.
I agree that the levelling of the playing field has been a key factor. The number of fixed-rate mortgages on offer at less than 2 per cent has caused a big increase in refinancing activity, so it is flowing through to household balance sheets.
WHETTON I think the TFF absolutely has achieved its aim of creating an effective monetary-policy pass-through once the zero-lower-bound interest rate was met. It has removed the major banks’ significant cost-of-funding issue from foreign-currency issuance, although it has also taken away the diversity of funding. Commonwealth Bank of Australia is now 75 per cent deposit funded, for instance.
This will slip in time and access to funding will return, not necessarily because the bank needs it but because it is good to keep diversified funding options open. Over the Christmas period, the Australian banks went to the US dollar market for CP out to one year because the basis was negative.
I am not sure on the business-lending proposition. The TFF drawdown for additional business lending has been soft. APRA [Australian Prudential Regulation Authority] numbers for deposit-to-loan ratios and nonfinancial corporate lending are at record highs, so we think the banks do not really need the money.
This goes back to the conversation around downside risk. If we were to get a spot outbreak of COVID-19 leading to a state-based shutdown, the uncertainty means businesses are not going to borrow to invest even with the ultra-low rates on offer.
This has been the case for a long time in many countries, even prior to the pandemic. Just because the cost of money is low does not mean businesses are encouraged to borrow.
We could get lucky in Australia. But for now we think businesses and households are in a good position with huge cash balances. The TFF borrowing can roll off without a significant change to cost of funds for the end user.
WHETTON Probably. Money is cheap everywhere in the world at the moment so demand for real assets is strong, whether it is in equities, infrastructure, property or land. If this becomes productive, insofar as lifting confidence and getting ‘animal spirits’ to return, maybe policy can be normalised over time.
However, I think – around the world – we are stuck with gumboots in the mud. Central banks are front and centre of our lives, driving policy outcomes – because governments have been timid with fiscal policy in the past.
Because of this, central banks will maintain a large presence for a long time to come. This means asset bubbles probably remain in place while the cost of money remains cheap, because there are massive savings that need to be used.
WHETTON I do not think it ever went away. Japan has been the precursor for everything in markets and society.
PLANK The RBA can only achieve so much. It has not really talked about the competitiveness aspect of the TFF and one of the reasons is that it probably does not want to highlight that some lenders are missing out. Any policy will have pros and cons, and ultimately I think the successes of the TFF outweigh the other effects.
WHETTON If nonbanks want to play on this field, they can pay the cost to become regulated as banks. Nonbanks are an important but ultimately small part of the lending market.
MCCOLOUGH There has always been a difference between bank and nonbank funding levels, and I do not think it has increased by too much due to the TFF.