New triple-pronged boost to lending announced

The Reserve Bank of Australia (RBA), the Commonwealth government and the Australian Prudential Regulation Authority (APRA) have announced a raft of new measures to support the domestic economy in the wake of the coronavirus (COVID-19) outbreak.

RBA easing

After an emergency meeting held today (Thursday, 19 March), the RBA’s monetary policy board decided to cut the official cash rate to a new record low of 0.25 per cent, commence quantitative easing (QE), and launch a new $90-billion term funding facility for businesses. 

As part of the RBA’s QE strategy, the central bank will target a 0.25 per cent yield on three-year Australian government bonds through purchases in the secondary market.

The QE strategy, which commences today (20 March), is also designed to “address market dislocations”. 

Meanwhile, the RBA’s $90-billion term funding facility (TFF) for the banking system is aimed at supporting the flow of credit to small and medium-sized businesses by providing authorised deposit-taking institutions (ADIs) with three-year funding facilities at a fixed rate of 0.25 per cent.

Under the TFF, ADIs will be able to obtain initial funding of up to 3 per cent of their existing outstanding credit and will have access to additional funding if they increase lending to business, particularly small and medium-sized businesses (SMEs).

As a result, the RBA noted that exchange settlement balances at the central bank will be remunerated at 10 basis points, rather than zero, to “mitigate the cost to the banking system associated with the large increase in banks’ settlement balances”.

The RBA would also continue to provide the banking sector with additional liquidity through repurchase (repo) transactions on the overnight money market.

RBA governor Philip Lowe said the central bank’s measures were warranted given the rapidly changing economic environment.

“The Reserve Bank board did not take these decisions lightly. But in the context of extraordinary times and consistent with our broad mandate to promote the economic welfare of the people of Australia, we are seeking to play our full role in building that bridge to the time when the recovery takes place,” he said.

“By doing all that we can to lower funding costs in Australia and support the supply of credit to business, we will help our economy and financial system get through this difficult period.”  

Government stimulus

Following the RBA’s announcement, the Morrison government revealed that in addition to the $17.6 billion stimulus package announced last week, it would inject up to $15 billion in funding to support lending to consumers and businesses.

The funds will be supplied to the Australian Office of Financial Management (AOFM), which will invest the capital in wholesale funding markets used by small authorised deposit-taking institutions (ADIs) and non-ADI lenders.

The $15-billion capacity would allow the AOFM to support a substantial volume of expected issuance by these lenders over a 12-month period.

In a joint statement, Prime Minister Scott Morrison and Treasurer Josh Frydenberg commented: “The government’s actions will enable customers of smaller lenders to continue to access affordable credit as the world deals with the significant challenges presented by the spread of coronavirus.

“Small lenders are critical to Australia’s lending markets, often driving innovation and providing competition for larger lenders.

“This funding will complement the Reserve Bank of Australia’s announcement of a $90-billion term funding facility for authorised deposit-taking institutions that will also support lending to small and medium enterprises.

“Combined, these measures will support the continued ability of lenders to support their customers and in doing so the Australian economy.”

APRA revises regulation

Moreover, APRA has announced that in light of the economic threat posed by the coronavirus and the RBA’s announcement, it will make temporary changes to its expectations regarding bank capital ratios to “ensure banks are well positioned to continue to provide credit to the economy”.

APRA noted that with banks maintaining capital levels “well above minimum regulatory requirements”, it would be appropriate to enable them to use the “large buffers” they’ve established to facilitate ongoing lending to the economy.

As a result, provided that banks meet their minimum capital requirements, it “would not be concerned” if they were not meeting the additional benchmarks announced in 2016 during the period of disruption caused by COVID-19.

APRA chair Wayne Byres commented: “APRA has been pursuing a program to build up the financial strength of the system for many years, when banks had the capacity to do so. As a result, the Australian banking system is well capitalised by both historical and international standards.

“APRA’s objective in building up this capital strength has been to ensure it is available to be drawn upon if needed in times such as this.”

He concluded: “[The] announcement reflects the underlying strength of the system: even if the banking system utilises some of its current large buffers, it will still be operating comfortably above minimum regulatory requirements.”

[Related: RBA announces emergency rate cut]