All Quiet On The Western Front: The End of the TFF

All Quiet On The Western Front: The End of the TFF
From Challenger chief economist Dr Jonathan Kearns

The RBA’s pandemic era Term Funding Facility (TFF) comes to an end this week with the final date for repayment of these cheap loans. The TFF provided banks with 3-year funding from the RBA, initially at 0.25% but with later drawdowns at 0.1%, in order to reduce the cost, and increase the availability, of loans for households and businesses. The initial and supplementary allowances provided each bank with a fixed amount of cheap funding based on its size, while the additional allowances provided further funds based on each institution’s new small and medium (SME), and large, business lending.

By the last date funds could be drawn in mid-2021 banks had drawn a total of $188 billion of TFF loans from the RBA. For a sense of magnitude, this was around half the total of bank bonds outstanding (domestic plus offshore). The $84 billion of the initial allowance had to be repaid by September 2023. The rest has to be repaid by the end of this month.

The repayment of the TFF will reduce the banks collective account balances at the RBA (their ‘ES balances’) by the same amount. Assuming they don’t change their balance sheet composition, banks need to replace this liquid asset holding to meet their prudential liquidity requirements. Most likely this will be by purchasing government bonds, in particular they will have been increasing their holding of state debt. That’s handy given state budget deficits mean more state debt being issued.

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The unwinding of the TFF also means the banks have to replace $104 billion of funding. To replace the TFF funding banks have had to raise more deposits and/or issue more bonds. There has been strong competition for deposits, with attractive term deposit interest rates.

Banks have also issued a substantial amount of bonds. Banks issued a large amount of longer-term bonds after the Global Financial Crisis to increase their secure funding, but then in the decade leading up to the pandemic the stock of financial institutions’ bonds outstanding increased by less than 10%. However, over the past 18 months the stock of financial institutions’ debt outstanding increased by some $70 billion, a 40% increase.

Despite this large increase in bond issuance there has not been any significant pressure in banks’ funding markets. The RBA pointed to some pressure in the lead up to the September 2023 repayment deadline with an increase in the bank bill spread (the excess interest rate on 3 and 6 month bills issued by banks over the expected cash rate, OIS). However, with this experience under their belts, banks were better able to manage the June 2024 deadline with less indication of market pressure this time.

The final repayment of the TFF brings to an end the pandemic era monetary stimulus measures. Interest rates near zero and unconventional monetary policy measures seem a distant memory now, but the time will likely come when interest rates again test their lower bound and we need to recall the important lessons learnt, including how smoothly the measures unwind.