Big four buy back billions in borrowings
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 it at lower interest rates.
ANZ 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 four, 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 purchase 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, but 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, Commonwealth, ANZ and NAB all passed on 20 basis points of this month's 25 basis point cut in the cash rate, blaming higher costs from increased competition for deposits.
Frequently Asked Questions about this Article…
Banks are buying back government-guaranteed wholesale bonds — wholesale debt that was issued under a taxpayer-backed guarantee introduced during the global financial crisis. They are repurchasing this guaranteed debt from bondholders so they can refinance it at lower interest rates in improved funding markets.
Close to $10 billion of government-guaranteed wholesale debt has been bought back in recent weeks. Westpac repurchased about $3.4 billion, NAB repurchased about $4.4 billion, and ANZ is finalising a plan to buy back up to $3.5 billion. The Commonwealth Bank had not bought back guaranteed debt in the same recent period.
Improved conditions in global funding markets mean major banks can now issue senior debt at much tighter spreads (around 80 basis points above benchmark) than the roughly 130 basis points they typically paid when using the government guarantee. By buying back the more expensive guaranteed debt and refinancing it with cheaper senior issuance, banks lower their overall funding costs.
The wholesale funding guarantee was introduced in 2008 to support the financial sector during the global financial crisis. It closed to new borrowing in early 2010 but continues to cover existing liabilities. Since 2008 the scheme has delivered about $3.9 billion to federal coffers. At its peak almost $170 billion of wholesale debt was guaranteed; Treasury figures showed liabilities had fallen to about $84 billion by mid-November.
When banks repurchase guaranteed debt, the government raises less from the scheme because banks no longer pay the guarantee fees on the repurchased amounts. The recent wave of buybacks (about $10 billion) is likely to reduce the scheme’s receipts by roughly $70 million. Analysts note the government effectively loses yield (about 70 basis points) on the amounts repurchased.
While wholesale funding costs have fallen, the article notes the big four banks — Westpac, Commonwealth Bank, ANZ and NAB — all passed on 20 basis points of a 25 basis point cash rate cut this month, citing higher costs from increased competition for deposits. That means improvements in banks' wholesale funding don't automatically translate into better rates for savers, as deposit-market pressures can still keep funding costs up.
The Commonwealth Bank was the only one of the big four that had not bought back government-guaranteed debt in the recent wave. Market sources said it would not be surprising if Commonwealth followed suit, since it is believed to hold several billion of guaranteed debt that could be refinanced at lower rates.
The scheme’s guaranteed liabilities fell from a peak of almost $170 billion to about $84 billion by mid-November. Buybacks are a contributing factor in shrinking the outstanding guaranteed amount because when banks repurchase guaranteed wholesale bonds and refinance them privately, those liabilities reduce the scheme’s balance.
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