BANKS are exploiting better conditions on global funding markets to buy back billions in wholesale debt that has been guaranteed by the taxpayer, with close to $10 billion snapped up in recent weeks.
Under the guarantee of wholesale borrowing, which provided a lifeline to the financial sector at the height of the global financial crisis, banks could pay the government a monthly fee in return for using its AAA credit rating.
Latest figures show the scheme, which closed to new borrowing in early 2010 but still has tens of billions in guaranteed liabilities, has delivered $3.9 billion to federal coffers since it started in 2008.
In a sign of the sharp improvement on funding markets since November, however, banks have sought to lower their costs by purchasing back guaranteed wholesale debt from bond holders and refinancing at lower interest rates.
ANZ Bank is this week finalising a plan to buy back up to $3.5 billion worth of government-guaranteed debt, after Westpac last month bought back $3.4 billion in bonds and NAB spent $4.4 billion on the same purpose. The head of Australian credit research at Deutsche Bank, Gus Medeiros, said banks had typically paid about 130 basis points over the benchmark rate when using the government guarantee.
Now, however, major banks can issue senior debt at significantly lower spreads of about 80 basis points above the benchmark.
"They are currently able to issue senior debt at a cost that is lower than the total cost related to the guaranteed debt that they have outstanding," Mr Medeiros said.
The Commonwealth Bank is the only big four lender that has not bought back government-guaranteed debt in recent weeks. Market sources said it would not be surprising if the bank followed the lead of the other big banks, as it is believed to have several billion in guaranteed debt that could be refinanced at a lower rate.
While the buybacks are designed to lower banks' funding costs, they also mean the government raises less from the scheme.
The latest wave of purchases in guaranteed debt, worth about $10 billion, is likely to lower the amount raised by the scheme by about $70 million.
Philip Bayley, a credit market specialist with ADCM Services, said: "The impact for the government is they are losing 70 basis points or so on the amount involved."
At the peak of the scheme, almost $170 billion in wholesale debt was guaranteed by the taxpayer. However, the latest Treasury figures from mid-November show the scheme's liabilities had fallen to $84 billion.
The trend comes amid ongoing controversy over bank funding costs, with the Reserve Bank saying this month banks had "no difficulty" accessing funding.
Despite the lower wholesale funding costs, Westpac, CBA, ANZ and NAB all passed on only 20 basis points of this month's 25 basis point cut in the cash rate, blaming higher costs from increased competition for deposits.