Likely impact of ‘TFF 2’

The first phase of banks’ refinancing of term funding facility debt was absorbed relatively easily by the capital market, supported by a surge in Australian domestic capacity. The second wave of redemptions, due by mid-2024, may have a somewhat greater impact.

DAVISON The first wave of Australian banks’ term funding facility (TFF) maturity refinancing seems to have passed in a relatively measured manner, assisted by the enhanced domestic capacity for bank issuance we have already discussed. How are market participants thinking about the second phase of TFF maturities?

SCHILLER The TFF maturity profile created a great opportunity with the six-month BBSW rate widening to OIS [overnight indexed swap] during July, due to bank LCR [liquidity coverage ratio] pressures. The six-month rate compared with three-month swap pushed out to the low 40s basis points over OIS. Credit margins increased this return further compared with the three-month rate of return. This will continue to be an area of focus for the next year as banks manage TFF maturities.

GIFFORD I agree that the first tranche of maturities appears to be rolling through fairly smoothly. The A$25 billion (US$16.2 billion) of term funding we did in our most recent half year really came from the NSFR [net stable funding ratio] trigger, so we largely pre-funded the near-term maturities including the TFF.

In late June and early July, we observed some signs of LCR pressure across the system. I’m sure there will be awareness of the statistics that showed deposits were, on average, actually falling.

There was some uncertainty about the drivers but the reality is we experienced some LCR pressure. Crispian is right that the banks tended to focus on six-month bank bill issuance and therefore we saw six-month bills blow out toward a historic high of 30 basis points.

This has eased in recent weeks, with pricing down in the low 20s basis points. LCR pressure seems to have relaxed. It helps when the majors are on screen with large term trades – the perception of immediate need for short-term funding falls away as well.

Going back to the TFF specifically, my stance was always that the first round of the TFF would be pretty smooth because it was distributed equally among the banks at 3 per cent of risk weighted assets. It was akin to normal maturities. We are well progressed in ours at ANZ, as we have been repaying some of the TFF gradually and in a smooth fashion.

I think the second round of TFF maturities might be a bit trickier because it had the five times small business lending component, which means there are some large maturity towers accross the sector. This is not something for ANZ – we have the lowest TFF requirement in the second round – but has the ability to affect the market.

There are some large requirements for some regional banks, too, and even some smaller ADIs [authorised deposit-taking institutions] the next level down. I expect there is a possibility that the second round of TFF might be slightly more bumpy, though I think the system overall is well placed.


The second round of TFF maturities might be a bit trickier because it had the five times small business lending component, which means there are some large maturity towers from some of the majors.


CORBETT The six-month spot break topped out at around 32 basis points in the recent run higher and is now back in the low 20s. It is interesting that while we are predicting that TFF round two could be a little more bumpy than version one, the forward curve in the three-month versus six-month basis is not accurately reflective of these likely troubles. The forward three-six basis break is well below current spot and significantly lower again versus the lofty highs we reached recently.

We think there is definitely a trade to be done here – to take advantage of market complacency. The curve needs to be steeper and higher through these dates, in our view.

GIFFORD The next few years will be really interesting – all our minds start to tick over with that one.

BAILLIE One area we have not touched on is that there is still a shortage of high-quality asset-backed securities issued by ADIs. There is still capacity in this space, and plenty of demand. We saw a bank securitisation deal recently that was basically all spoken for before it arrived. There is definitely appetite for high-quality, shorter-duration triple-A paper.

GIFFORD Earlier in the year, there seemed to be a near-universal view among the four major banks’ economics teams that house prices would fall by 15-20 per cent. The real pivot has been the change of population dynamic story: shortage of housing and difficulties for renters has absolutely flipped the dialogue and, of course, would be very supportive for RMBS [residential mortgage-backed securities].