BOQ joins rush to buy back debt guarantees
Under the guarantee of wholesale borrowing, which provided a lifeline to the sector at the height of the global financial crisis, banks have been able to effectively rent the government's AAA credit rating in return for a fee.
Banks embraced the guarantee, which has since closed to new debt issues, with almost $170 billion in debt guaranteed by the taxpayer in early 2010.
But with better market conditions lowering the cost of new borrowing, it now makes sense for banks to buy back their guaranteed debt as it approaches maturity.
BOQ, which was charged a larger fee than the big four for using the guarantee, on Tuesday offered to buy back a batch of government-guaranteed bonds that will mature in October.
Commonwealth Bank, Westpac, ANZ and NAB have all made similar moves in recent months, delivering healthy returns to investors who purchased the bonds at the peak of the financial crisis. The rush comes as banks face more favourable conditions on funding markets, a trend that some industry figures say could ultimately flow into lower rates on mortgages and term deposits.
During the financial crisis in 2009, big banks were typically paying 60 to 110 basis points over the benchmark when they issued new debt, plus the government's fee of 70 basis points.
For a lower-rated bank such as BOQ, the fee was 100 basis points. Now, however, higher confidence on international debt markets means the big four can borrow at about 100 basis points over the benchmark.
Bendigo and Adelaide Bank's managing director, Mike Hirst, on Monday predicted the drop in wholesale funds would cause interest rates on term deposits to ease later this year, as banks compete less fiercely for deposit funding.
The chief executive of the Commonwealth Bank, Ian Narev, also said last week he expected wholesale funding conditions to improve, though he would not speculate about what this meant for people with mortgages or savings accounts.
The BOQ deal is the latest in a spate of buybacks in which Australian banks have spent some $15 billion on government-guaranteed bonds, according to Reserve Bank estimates.
The latest Treasury figures show the scheme's liabilities had fallen to $65 billion in December, and the program had raised about $4 billion in fees for the federal government since its inception in 2008.
Frequently Asked Questions about this Article…
BOQ said it would offer to buy back up to $653 million of government-guaranteed bonds that are due to mature in October, taking advantage of improving funding-market conditions to remove that taxpayer-guaranteed debt from its balance sheet.
The wholesale borrowing guarantee was a government scheme launched during the global financial crisis that let banks effectively 'rent' the government's AAA credit rating for a fee. It provided a funding lifeline when markets were strained; the scheme has since closed to new debt issues.
Alongside BOQ, the Commonwealth Bank, Westpac, ANZ and NAB have all made similar buyback moves in recent months. Reserve Bank estimates show Australian banks have spent about $15 billion on these buybacks.
Banks embraced the guarantee early on, with almost $170 billion of debt guaranteed by the taxpayer in early 2010. Treasury figures show the scheme's liabilities had fallen to about $65 billion by December, and the program raised roughly $4 billion in fees for the federal government since 2008.
Improving confidence in international debt markets has lowered the cost of new borrowing, so it often makes financial sense for banks to repurchase government-guaranteed bonds as they near maturity rather than refinance them under older, more expensive terms.
During the crisis, big banks typically paid 60–110 basis points over the benchmark when issuing debt plus a government fee of 70 basis points. Lower-rated banks such as BOQ were charged a higher government fee—around 100 basis points—whereas the big four faced the standard 70 basis points.
The article notes industry figures believe improved wholesale funding conditions could ultimately flow into lower mortgage and term deposit rates. For example, Bendigo and Adelaide Bank’s MD Mike Hirst predicted term deposit rates may ease later in the year, while Commonwealth Bank CEO Ian Narev said he expected funding conditions to improve but wouldn’t speculate on exact impacts for customers.
Reserve Bank estimates indicate banks have spent about $15 billion repurchasing government-guaranteed bonds. Treasury figures show the guarantee program raised about $4 billion in fees for the federal government since it began in 2008.
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