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The University of Melbourne's Kevin Davis says bank share buybacks aren't a good look against the backdrop of Covid-related support banks have received

The University of Melbourne's Kevin Davis says bank share buybacks aren't a good look against the backdrop of Covid-related support banks have received
Australian bank logos

By Kevin Davis

Much has been written about the taxpayer-funded windfalls to some companies provided by the A$90 billion JobKeeper scheme. Their gains have come from grants given to them to offset projected COVID-19 losses — with no obligation to pay that money back when the losses didn’t eventuate.

Australia banks may have reaped a similar (albeit much smaller) windfall via the Reserve Bank’s Term Funding Facility (TFF).

This loan scheme handed banks A$188 billion at extraordinarily cheap interest rates to help them “support their customers and help the economy through a difficult period”.

But it appears this cheap money may have given the three biggest banks — Commonwealth Bank, National Australia Bank and ANZ Bank — the opportunity to enrich their shareholders through funding share buybacks rather than repaying the cheap loans.

There would be nothing wrong with the share buybacks if the effective subsidy built into Reserve Bank’s cheap loans, worth hundreds of millions of dollars a year, has been passed through to the intended recipients — borrowers, particularly business borrowers. But this is far from clear.

Let me explain.

How the Term Funding Facility worked

The Reserve Bank of Australia (RBA) introduced the Term Funding Facility in March 2020. It offered to lend each bank, at a cheap interest rate, an initial amount (a “general allowance”) equal to 3% of the bank’s loans outstanding at that date.

An “additional allowance” was available if a bank grew its lending to businesses, particularly small businesses (where an extra A$5 was available for each A$1 loan growth).

The banks borrowed A$84 billion by September 2020. The RBA then put another A$57 billion of general allowances on the table. By the time it wound up the scheme in June 2021, the RBA had lent the banks A$188 billion. Of this, A$40-50 billion were “additional allowances” for expanded business lending.

The RBA initially offered these loans at a fixed three-year rate of 0.25%, equal to its overnight cash rate target. In November 2020 it cut the interest rate on new advances to 0.1%, in line with the cut in its cash and three-year-bond rate target.

This was well below the banks’ cost of funds from other sources, so it amounted to subsidised funding from the RBA — and ultimately the taxpayer. For example, had the RBA instead bought bonds issued by the banks in the capital market, it would have earned a higher rate of return, increasing its profits. This in turn would have helped reduce the government budget deficit and the need for tax dollars to fund that deficit.

Did business borrowers benefit?

My ballpark estimate of the value of the interest rate subsidy, meant to flow through the banks to business borrowers via lower cost lending, amounts to A$500-A$600 million a year for three years. This estimate is based on comparing the cost of three-year debt financing by the banks from the capital market with the TFF rate.

The four big banks — ANZ, Commonwealth, NAB and Westpac — got about 70% of this.

If the banks fully passed this subsidy on to who it was intended to help — businesses needing cash to stay afloat or expand — there wouldn’t be anything to consider here. But the meagre publicly available evidence provides no confidence they did.

Members of the Australian Banking Association meet with federal treasurer Josh Frydenberg in March 2020.

Members of the Australian Banking Association meet with federal treasurer Josh Frydenberg in March 2020. Peter Braig/AAP

Interest rates charged to business borrowers have fallen since February 2020, but not by significantly more than would have been expected given the general fall in interest rates. With the introduction of the federal government’s loan guarantee scheme for small and medium-sized enterprises, a much greater fall in rates for those borrowers could have been expected.

Whether the cheap RBA funding has prompted more lending is also questionable. In aggregate, the statistics show business lending has been stagnant since early 2020, with virtually no growth in outstanding loans for either small, medium or large businesses.

But that doesn’t mean the TFF hasn’t had an effect. What sort of decline might have happened in the absence of support measures is anyone’s guess.

That said, it’s a fact the banks have taken the opportunity to grow their most profitable line of activity, lending for housing. The cheap TFF money wasn’t necessary for this to occur, as evidenced by the huge liquid asset holdings of the banks, but it could have helped.

In the meantime, bank profitability has bounced back from early 2020, when the banks had to make provisions for possible bad debts, which are now being reversed.

Share buybacks now are not a good look

All this means the banks have ended with surplus cash. What to do: use that money reduce borrowings (including TFF loans) or return funds to shareholders by buying shares back from them?

The major banks appear to opting for the latter, spending up to A$15 billion on share buybacks over the next year.

Share buybacks can be done in several ways, but all essentially involve repurchasing shares on issue, held by investors, in exchange for cash. They are the profit-maximising way to dispose of surplus funds, increasing the value of shares by reducing their number.

But if banks have the cash to do this, and retained some of the subsidy from cheap TFF funding, the more socially accountable thing to do would be to first repay the cheap money the RBA lent them to “help the economy”.

There should be enough transparency about the effects of the TFF for the public to be confident the RBA has not effectively subsidised profits for shareholders. With no clear evidence, the big banks’ share buybacks are not a good look, and raise similar questions to those about JobKeeper “rorts”.The Conversation


Kevin Davis, Emeritus Professor of Finance, The University of Melbourne This article is republished from The Conversation under a Creative Commons license. Read the original article.

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25 Comments

That's why people should question banks on their interest spreads computation.

It's easy to front run the mortgage rates while using rising wholesale funding cost as an excuse when you don't actually get to see what and how much other sources of funding they get, at what rates and the formula for determining that spread.

Kiwis will do well without Aussie banks.

Support your local banks instead.

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Unbelievable. 

Morally corrupt scum.

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13

Is it unbelievable though? It's the same thing they've done every other time they've been bailed out or given relief payments.

Seems that we should be more incredulous about the fact that these payments didn't come with a few strings forbidding them from pissing it away juicing their share prices.

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13

Don't hate the player, hate the game. We should be focusing our ire on the central bankers and politicians who minted the money for them.

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good for us shareholders , banks are a money creating money making machine

people still think of them in terms of a piggy bank 

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Modern day central and retail banking is a close to morally empty as one can get - which is an unfortunate position they find themselves.

In times gone past, the bank manager was a highly respected position in most communities.

Now most bankers are viewed as the runners of a ponzie scheme (housing) of whom is more about their own financial profit than doing anything beneficial for society.

Banking needs a massive clean up to improve its public image.

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9

I listened to George Gammon interview Richard Werner yesterday. Werner sounds like he can't see the future of retail banking - especially noting that they no longer appear to want to lend to GDP qualifying activities but instead primarily residential property which is resulting in asset bubbles. He see's a day where people have individual bank accounts with the central bank, completely removing retail banks from residential property lending - this he says will help eliminate the issues we are facing with inflation vs asset bubbles.

He seems a system similar to old school soviet style banking for the western world - who'd have thought....

Seems completely bizarre that we've messed things up so much the last 40 years that we now need a communist style system to save us from ourselves. Imagine Ronald Regan (or his peers) putting up with that? Boomer generation with the help of gen x (no offence) have essentially destroyed most things that the greatest generation stood for. Will millennials be fans of communism - given how left wing they appear to be, perhaps we need it to save ourselves from the perils of capitalism?

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If there has been anything more unusual about the past few quarters, the love of safe and liquid assets hasn’t been that thing. Instead, it has been the turning away from loans and lending – there the data aligns with Mr. Dimon if, however, for the opposite reasoning.

Loans had already been largely avoided in the post-2008 era, but since 2011 had at least been advancing in nominal and absolute terms (though in linear terms, still shrinking).

Apart from the big jump in loans in Q2 2020 as companies all over the place forced banks to standby their existing revolvers, lending has only dropped ever since. No matter the Fed and its variety of puppet show variations, nor Uncle Sam’s overtures into increasingly every corner of the economic sphere. Banks are saying “yes” to safety in a big way and “no” to risk-taking in a bigger way (which is what loans are, especially in the sense of liquidity risks). Link

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I guess banks indirectly or otherwise were the underwriting buyers of substance for this US 8 week Treasury Bill all the way down to 0.01%. The return of capital and the right to rehypothecate this type of collateral outweighs the low nominal returns.

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DFA in AUS has been calling out this c##p for some time. Interview with Robbie Barwick National Research Director from the Citizens Party is onto the banksters as well. The system is bankrupt...

‎Digital Finance Analytics (DFA) Blog: DFA Live Q&A: HD Replay Robbie Barwick - It's The Economy Stupid! on Apple Podcasts

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So the bottom line here to me is that Governments learnt nothing from the GFC when they bailed the banks out, leaving ordinary people hung out to dry. They are to all intents and purposes, repeating the cycle. Without tight and firm, robust regulation and a way to be able to mandate some behaviour and actions the banks will NEVER act to support community resilience except where it has an immediate impact on their bottom line. 

Governments would achieve a much better outcomes by sending money direct to people and business's while preventing banks from stacking interest rates and fees. But of course this will never happen.

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You bailout morally corrupt institutions during the GFC then give them cheap funding to participate in share buy backs for a decade....

Then expect good outcomes?

Its not that they have learned anything, its that they learned that you're better off being morally corrupt than have morals because that is what this capitalistic system wants. Or is it not?

Look the quality of the characters it has created - including on this website let alone the finance sector as whole...see CWBC, TTP etc. 'Greed is good'.

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And althought the views of TTP and CWBC may be a minority on here, they are surprisingly common within the general populus. NZ has changed a lot since I was a child, the majority of which is for the worse.

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Populace. 

Trolls are trolls. I actually think troll behavior is good. It's like a prism into the fears of the suburbs. 

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Banks don't require money to lend as they create new money when they lend as the Bank of England explained. What they do require are reserves to operate their exchange settlement accounts, capital holdings and enough liquidity to cover thirty days of trading under the Basel 111 international banking regulations.

Banks operate in the manner of PPPs as Warren Mosler described and are in some ways only an extension of the central bank anyway and are entirely dependent upon it for their operation.

Also there is no such thing as taxpayer money and taxpayers do not fund anything as taxation only deletes currency. Taxpayers cannot fund government deficits as they are not currency issuers, the government is the currency issuer and so must spend first before it can tax or borrow. Borrowing is an interest rate mechanism and not a funding operation. 

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Banks operate in the manner of PPPs as Warren Mosler described.....

I tend to think of MMT proponents like Jehovah's Witnesses now. I hope you don't take that the wrong way. 

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Warren Mosler has a far better understanding of banking and economics than any mainstream economist. He became a billionaire through trading government bonds because he understood how the system operates. Mainstream orthodox economics is far more like a religion than anything that MMT has to say.

This is what he had to say here. https://www.huffpost.com/entry/proposals-for-the-banking_b_432105

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I'm aware of Mosler and know his background. To be honest, there are far more wealthy people than Warren who also promote Austrian economics. MMT is far more part of institutional thinking than the Austrian school.  

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NZ desparately needs a publicly-owned bank providing no frills loans, mortgages, current and savings accounts, payments processing etc. The infrastructure is now so straight forward that there is no rationale for letting Aussie shareholders cream money out of the country. I have lots of friends in banking and each and every one knows that it is a licence to print money (figuratively and literally).

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Isn't that what Kiwibank was intended to be but it was never given the government support that it should have had.

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I don't know why more people don't join Cooperative Bank. They provide exactly the same services as the big Aussie banks/Kiwibank, but accountholders are shareholders. Fees etc are reasonable and you get a dividend each year from the bank's profits.

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2

they are doing what they legally have to do, maximise value for shareholders.

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Strawman. These banks do not operate in a 'free market' like say a manufacturer of goods. Furthermore, no other industry has a direct line to the ruling institutional elite and the privilege of creating their product from thin air. 

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If Kiwibank merges with Westpac then move elsewhere and send them this article when they ask why.

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