Stimulus wanes bank dependence on foreign funding

According to a new analysis from Moody’s Investor Service, the federal governments $260-billion stimulus program in response to the COVID-19 crisis has helped mitigate financial stability risks across the banking sector by reducing dependence on foreign funding.

Thus far, the stimulus has included cash payments to households and the Reserve Bank of Australia’s associated quantitative easing (QE) program, which has resulted in the purchase of $54 billion in government bonds from the banks.

Moody’s noted that such measures have driven strong monthly growth in deposits across the banking system, up 5.2 per cent in March and 2.4 per cent in April.

This compares to average monthly deposit growth of 0.8 per cent over the 12 months to March 2020. This resulted in the issuance of approximately $108 billion in debt securities among the big four banks during respective 2019 fiscal years.

“This significant deposit growth has lowered banks’ risk of short-term liquidity constraints, with short-term bank securities outstanding declining to $16.7 billion from $20.1 billion over the first quarter of 2020 and likely to continue declining over the next six months,” Moody’s stated.

At the same time, wholesale debt issuance is expected to decrease “substantially” in the second half of 2020.

“While business credit growth accelerated in March 2020 as companies drew down committed credit lines, personal credit is likely to decrease further while housing loan growth is likely to slow,” the ratings agency added.

Moody’s also pointed to the RBA’s term funding facility, which provides three-year funding at a fixed rate of 0.25 per cent.

According to the ratings agency, the facility would “cover banks’ refinancing needs” over the next six months and “reduce their need to resort to wholesale market funding”.

Australia’s banks have only drawn down approximately $6.3 billion of an available $135 billion in term funding from the RBA.  

[Related: Westpac most vulnerable to rise in defaults: Morgan Stanley]