Many have written about the A$90 billion JobKeeper scheme’s taxpayer-funded benefits to certain companies. They have benefited from grants that were given to offset COVID-19 losses. However, they are not require to return the money if the losses do not occur.

Australia’s banks might have received a similar, but smaller, windfall through the Reserve Bank’s Terms Funding Facility (TFF). Banks were able to borrow A$188 billion with extremely low interest rates in this loan scheme. This was to support their customers and help the economy through a difficult time.

It appears that this cheap money has allowed the three largest banks, ANZ Bank, National Australia Bank and Commonwealth Bank. The chance to increase their shareholders by funding share buybacks instead of repaying the loans.

If the subsidy that Reserve Bank provides in cheap loans to borrowers of hundreds of millions of dollars per year is passed on to the intended recipients. Borrowers and business borrowers, then there would be no problem with share buybacks. This is not clear. Let me explain.

How The Term Fining Facility Worked Billion

In March 2020, the Reserve Bank of Australia (RBA), introduced the Term Financing Facility. It offered to lend banks, at a low interest rate, an initial amount a general allowance equal to 3% of their outstanding loans at that time. A bank could get an additional allowance if it grew its lending to small businesses, especially small ones where an additional A$5 was offered for every A$1 loan increase.

By September 2020, the banks had borrowed A$84 trillion. After that, the RBA offered another A$57 trillion in general allowances. The RBA had already lent A$188 billion to banks by the time it ended the scheme in June 2021. A$40-50 Billion were additional allowances to expand business lending.

These loans were initially offered by the RBA at a fix rate of 0.25% for three years. This was equal to its overnight cash rate target. It cut the interest rate for new advances to 0.1% in November 2020, in accordance with its reduction in cash and three year-bond rates targets.

It far less than the cost of funds from other sources for banks, so it was subsidise funding from RBA and eventually the taxpayer. If the RBA had instead purchased bonds from the capital market banks, it would have earned higher returns, increasing its profits. This would have reduced the government’s budget deficit and increased the amount of tax dollars needed to finance it.

Are Business Borrowers Able To Benefit?

I estimate that the subsidy in interest rates, which is meant to flow through banks to business borrowers using lower-cost lending, will be between A$500 and A$600 million per year for three years. This is based upon comparing the TFF rate with the cost of three years debt financing by banks from the capital markets.

This was about 70% for the four major banks ANZ (Community, NAB, NAB, and Westpac).

There wouldn’t have anything to think about if the banks had fully transfer this subsidy to those it meant to help, namely businesses that need cash to grow or stay afloat. The evidence that they did not is insufficient to prove their confidence.

The interest rates charged to business borrowers fell slightly since February 2020. However, this is not a significant drop considering the general decline in interest rates. A much larger drop in interest rates could have been expect after the federal government introduced its loan guarantee scheme for small- and medium-sized businesses.

It is also uncertain whether the RBA’s cheap funding has led to more lending. The statistics show that business lending has stagnated since the beginning of 2020. There has been virtually no growth in outstanding loans to small, medium, and large businesses. However, this doesn’t mean that the TFF hasn’t had an impact. It is impossible to predict what kind of decline would have occurred without support measures.

However, the fact is that banks took the opportunity to expand their most profitable activity, housing lending. This was possible despite the fact that the TFF money was not necessary, as shown by the large liquid assets of the banks. Bank profitability has rebounded from early 2020 when banks had to make provisions in case of bad debts. This now being reverse.

Not A Good Idea To Buy Shares Back Now Billion

This means that banks now have surplus cash. You can use this money to reduce borrowings (including TFF loan) or to return funds to shareholders by purchasing shares back. Major banks seem to prefer the latter and spend up to A$15 trillion on share buybacks in the next year.

There are many ways to do share buybacks. However, they all involve investors repurchasing shares that were issue in return for cash. These are the best way to make a profit and get rid of excess funds. They increase the value of shares while decreasing their number.

However, if banks have the cash and some subsidy from TFF funding, it would be more socially responsible to repay the RBA’s cheap money they borrowed to “help the economy”.

The public should have enough information about the TFF’s effects to feel confident. That the RBA hasn’t effectively subventioned share holders profits. The big banks’ share-buybacks aren’t a good look and raise similar questions as those regarding JobKeeper rorts.