RBA’s $200b line of credit to Australian businesses had little benefit

How would you feel if you gave someone a $200 billion boost and it didn’t help them in the slightest?

Pretty peeved, I’m guessing, but that is exactly what has happened to the beleaguered Reserve Bank of Australia, which offered almost an almost $200 billion line of credit during the COVID lockdowns to help small and medium sized businesses out.

While people are keen to pile on and criticise the RBA nowadays, in its defence it is good to note that it was a study of the term funding facility produced by their own economists that found that the massive boost “probably” failed in helping to boost business lending.

Analysing assistance programs so you can get ready to provide better support during the next crisis is an excellent idea and the RBA should be congratulated for both providing the assistance it thought would help in a time of crisis and for analysing how it worked and didn’t work so it is better prepared next time.

Businesses miss out on the benefits – but not banks

So, if a total of $188 billion was drawn down from the facility at tiny interest rates and that money didn’t help borrowers, who did benefit?

You’re really not going to like the answer the trio of RBA economists came up with – the biggest beneficiaries from the program were Australia’s big banks.

That would have been a difficult thing to imagine back in March 2020 when the RBA held an emergency board meeting and launched the initial facility of $90 billion – starting at an interest rate of 0.25% which was cut to 0.1% in November of the same year.

As the pandemic gripped the country in a series of crippling lockdowns and restricted large parts of the local and world economy, the RBA was very concerned that the banks would heavily restrict access to loans by small and medium businesses as they struggled to access credit.

Interestingly, the study, by RBA economists Sharon Lai, Kevin Lane and Laura Nunn, found that one of the issues was the mix of assistance measures that led to many businesses not needing to borrow as much money during the pandemic.

JobKeeper boosted business cash flow

Those that did need to borrow were probably debt shy given the massive uncertainty about the length and depth of the global lockdowns.

The major conflicting assistance measure was the Federal Government’s $90 billion JobKeeper program, which was announced a couple of weeks after the term funding facility.

JobKeeper effectively underwrote business payrolls, which reduced the need for business spending and was the reason why some of the more adept businesses that effectively pivoted online quickly during the pandemic actually made exceptionally good profits during this period.

It simply didn’t work

The conclusion of the economists was that the facility had no “statistically significant effects”.

“Overall, we find no statistically significant effects of the TFF on bank credit growth for SMEs compared to large businesses, and mixed results when comparing aggregate business credit growth for TFF-eligible banks against ineligible non-banks,” the study found.

“We also find no statistically significant effects on aggregate business credit growth for eligible banks that accessed the TFF compared to banks that did not draw down.”

Businesses avoid loans but banks benefit

While businesses weren’t feeling the benefits, for the big banks it was a whole different story.

The facility was used by 92 banks in total but the lion’s share went to some very familiar names.

Between them, Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB), ANZ (ASX: ANZ) and Westpac (ASX: WBC) accounted for about 70% of the total credit line.

And because the super low-cost lending is fixed for three years, these big banks will keep making plenty of money on the line of credit during a much higher interest rate period until the middle of 2024.

A neat $500m a year or more

Exactly how much money the banks will make from the facility is uncertain but some back of the envelope calculations have put it at around $500 million a year and possibly more.

Not all of this money was entirely wasted, with the lower costs of funding being enjoyed by the banks being passed on to customers in some measure in the form of lower interest rates.

However, if you are looking for the biggest beneficiary from this largesse it would be hard to go past the big banks.

Which is yet another reason why bank shares occupy a place in so many investor portfolios.