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 article refers to a large taxpayer‑backed credit facility – described as a bailout fund – that effectively lets the big banks access around $380 billion at a low interest rate (around 3.4%). Taxpayers fund and guarantee this support, including an existing deposits guarantee that covers about 60% of bank funding “for zero compensation.”
The Committed Liquidity Facility (CLF) is a permanent line of credit for banks mentioned in the article. It’s presented as an unusually generous facility by global standards and was scheduled to come into play in 2015, giving banks access to cheap emergency funding.
The article says the biggest beneficiaries are Australia’s big four banks – Commonwealth Bank, Westpac, NAB and ANZ – because the wholesale funding guarantee and the CLF are priced and structured in ways that favour large banks over smaller lenders.
According to the article, big banks can lodge assets they already hold — including loans such as car loans — as collateral at the Reserve Bank and borrow billions at a very low rate (the article cites about 3.4% or the cash rate plus small margins of roughly 25 and 15 basis points).
No. The article notes that smaller building societies and credit unions are not subject to the same liquidity tests and therefore will not have access to the bailout facility, which raises concerns about fairness in the support framework.
The article highlights a contrast: while banks can access cheap funding, ordinary borrowers face much higher rates — average mortgages around 5.65% (fully discounted), small business loans averaging about 8.45%, and loans secured against a business owner’s home around 7.6% — prompting questions about whether taxpayers’ support is translating into better rates for customers.
The piece argues the facilities create moral hazard because banks may face less market discipline if they can rely on taxpayer‑backed guarantees and cheap central bank credit. It also criticises the lack of public debate when these generous arrangements were established.
The article’s author suggests yes: by global standards the combination of the deposits guarantee, wholesale funding guarantee and the CLF appears exceptionally generous, and the piece concludes that Australia might have one of the most generous bank support mechanisms in the world.
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