Bailout fund does the big banks plenty of favours
Taxpayers already guarantee 60 per cent of bank funding via the deposits guarantee for zero compensation. Yes, it is exceptionally generous, the so-called Committed Liquidity Facility, which is in effect a permanent bailout facility that comes into play in 2015. Christopher Joye, the managing director of property research group Rismark, makes the point that this massive line of credit is unusual and generous by global banking standards and it has been established with "no public debate".
"Smaller building societies and credit unions are not subject to the liquidity tests and will not, therefore, have access to the bailout fund," Joye writes in the Financial Review.
To put this in perspective, bank loans to small businesses now average 8.45 per cent. Secured by the business person's residential property, they are priced at 7.6 per cent. The average mortgage holder is forking out 5.65 per cent fully discounted.
Yet the biggest businesses in Australia - Commonwealth Bank, Westpac, NAB and ANZ - will be able to trot down to the Reserve Bank, lodge a bunch of their own loans - car loans if they like - and march off with billions at the bargain-basement interest rate of 3.4 per cent for 12 months or more.
The wholesale funding guarantee - with its prejudicial pricing in favour of the big four - is still in play until 2015 and, now, we have the mother of all bailout funds.
If any other business in the country can't meet its obligations it has to render itself insolvent. But the banks can just shimmy on down to the RBA, chuck a bit of collateral over the counter and romp off with a few lazy billion at the cash rate plus 25 basis points and another 15 basis points.
That is indeed nice work if you can get it. Nobody would disagree that Australia should have a strong banking system. Most agree, grudgingly, that the country has been well-served by its banks.
But where is the debate on this issue? Where is the debate about "moral hazard"? Why should the banks pay any heed to the disciplines of risk whatsoever if they have no chance of going bust but are nonetheless hardly paying for the privilege of community support?
Does this country have the most generous support mechanisms for banks in the world? The answer would appear to be yes.
Frequently Asked Questions about this Article…
The CLF is a massive credit line described in the article as around $380 billion that will allow the big banks to access cheap funding (quoted at about 3.4% in the piece). The article says the CLF effectively acts as a permanent bailout facility that comes into play in 2015.
The article points out taxpayers already guarantee about 60% of bank funding via the deposit guarantee for no compensation, and the CLF is another form of taxpayer-backed support—effectively extending low-cost funding to banks at taxpayer risk.
According to the article, the big four — Commonwealth Bank, Westpac, NAB and ANZ — benefit from these facilities. Smaller building societies and credit unions are not subject to the same liquidity tests and therefore won’t have access to the CLF as described.
The article contrasts the CLF rate (about 3.4%) with real-world lending: average small business loans around 8.45%, secured business loans about 7.6%, and an average mortgage rate of roughly 5.65% (fully discounted), highlighting a large gap between what banks pay and what customers pay.
The piece explains that big banks can lodge their own loans (even car loans) as collateral at the Reserve Bank and borrow billions for 12 months or more at the bargain-basement rate quoted (about 3.4%), or at the cash rate plus small basis-point margins described in the article.
The article describes a wholesale funding guarantee with pricing that favoured the big four banks; it was still in play until 2015 and is presented as part of the broader set of preferential support measures for major banks.
Yes — the article raises the moral hazard concern: if banks can rely on low-cost, taxpayer-backed facilities and face little chance of failure, they may have weaker incentives to manage risk properly, while other businesses must face insolvency if they can’t meet obligations.
The article cites Christopher Joye of Rismark saying the arrangement is unusual and generous by global banking standards, and it concludes that Australia appears to have some of the most generous bank support mechanisms in the world.
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