The Reserve Bank established a $90 billion funding facility for 130 banks or authorised deposit taking institutions at 0.25 per cent for three years as part of its emergency response to the coronavirus crisis on March 19.
It has since super-sized the pool of cheap money available on three-year terms to $200 billion, and it will be available until 2021. Big banks have been able to use the funding to offer customers fixed-rate home loans at rock bottom rates as low as 2 per cent, leading to a wave of refinancing.
It has been estimated that 70 per cent of all refinancing activity over the last six months has been captured by the big banks. Lenders such as Firstmac are reporting a halving of market share since the TFF opened for business.
Support for smaller lenders has been extended through a $15 billion facility established by the Australian Office of Financial Management; however, the AOFM was merely supporting players in the securitised market by buying at the going rate.
RBA aware of consequences
Unable to access the discount provided by the TFF, the cost of funding for non-bank lenders and others has remained the same. Firstmac raised $1.3 billion in July at around 1.45 per cent plus BBSW, putting the lender 120 basis points behind those with access to the TFF.
“Extending the TFF program to smaller lenders will allow the public to keep accessing subsidised loans in the short-term, while ensuring that competitors are still around to provide competition after the crisis has passed and the program is wound up,” Mr Cannon said.
The Australian Financial Review understands that the Reserve Bank was not blind to the consequences of subsidising one part of the system at the expense of another.
Rather than reinventing the wheel, it relied on a system the Australian Prudential Regulation Authority already had in place to monitor member entities.
The program allows banks to apply for 3 per cent of their total book in funding, rising to 5 per cent, and about $80 billion in funding has been allocated so far.
Before the TFF was established, Firstmac’s loans were running off at a rate of about 18 per cent per annum. However, today that has spiked to about 30 per cent as customers refinance with the big banks, which are using big cash rebates as an added incentive, buying back market share they lost after the Hayne royal commission.
Despite having access to billions in cheap funding, customers seeking to refinance loans are being forced to wait weeks and months as banks deal with a backlog of requests and prioritise triaging almost one million deferred loans.
Firstmac is one of Australia’s largest non-bank lenders, having written more than 130,000 home loans, and manages $12 billion in mortgages. Mr Cannon said if the uneven playing field is not rectified, the worst-case scenario will see the next generation of fintechs and challenger banks killed off before they can even get started.