TFF killing non-bank mortgages

Via Banking Day:

Small lenders have hit out at the Reserve Bank’s access rules for its Term Funding Facility, arguing that it is delivering a big funding “free kick” to the major banks at the expense of competition in the home loan market.

Under the A$200 billion funding program set up in March to help banks access cheap funding during the COVID-induced recession, the RBA denied access to non-bank lenders and only allows newly licensed banks with small balance sheets to apply for the equivalent of 3 per cent of their existing loan assets.

That means the lion’s share of the taxpayer-subsidized cash is earmarked for the major banks – CBA, NAB, ANZ and Westpac.

Critics of the access rules say the four majors are using the facility to fund billions of dollars of sharply priced fixed-rate mortgages to lure borrowers away from small institutions.

“The underlying feature of the TFF is that it has been designed to make interest rates super low,” said Peter Sheahan, a director of institutional markets at Curve Securities.

“It has been designed for the major banks to get them off the drug of offshore funding.

“Every ADI has been invited to come in behind the containment line of the TFF and unfortunately non-banks have been told to stand outside.

“It creates a massive distortion.”

While small institutions are continuing to market more attractive variable rate offers to home borrowers, the major banks are using TFF cash priced at only 25 basis points to tighten their stranglehold on the mortgage market with cheap two-year fixed rate loans.

Non-bank lenders cannot match the fixed rate offers of their major rivals because the RBA has chopped them out of the taxpayer-backed facility.

Athena Home Loans co-founder and director Michael Starkey last night slammed the design of the TFF, warning that it could ruin mortgage competition that had been painstakingly rebuilt in the decade following the 2008 Global Financial Crisis.

“The RBA has delivered a big free kick to the banks – a $200 billion dollar market distortion that is eroding competition,” Starkey told Banking Day.

“Banks are taking advantage of the $200 billion in subsidised funding from the RBA by offering extremely low fixed rate loans – which has grown from thirty per cent to as much as seventy per cent of refinance activity.

“These fixed rate products lock customers in for a multi-year period, and then sting the borrower by converting to standard variable rates that can be as high as four per cent.

“Clearly it is critical for the RBA to respond in the current COVID economic crisis.

“But the design of the regulatory response to a crisis has long term implications for competition.”

Newly licensed banks are also worried about the anti-competitive effects of the TFF even though they are eligible for flakes of funding through the facility.

Robert Bell, the chief executive of one of Australia’s newest banks – 86 400 – warned a Senate committee in April that the TFF was likely to diminish competition in home lending because it was structured to deliver most of its cheap funding to the majors.

Last night Bell renewed his plea for the RBA to review the funding restrictions on recent market entrants.

“Introducing the TFF based upon 3 per cent of an ADI’s Total Credit Outstanding was a meaningful and practical way for the RBA to provide funding into the banking sector to support the broader economy, which has our full support,” he said.

“Unfortunately, this allocation methodology places newer banks and lenders at a competitive disadvantage.

“New business flows are being redirected away from smaller new players to more entrenched participants, which benefit disproportionately from TFF by virtue of the size of their balance sheets.”

Bell said his bank would like to see the eligibility mechanism for the TFF retained in its current form, but called on the RBA to set the size of the facility at a fixed amount of $200 million for recent entrants.

“This would help ensure a level playing field, precisely at a time when competition in the market is both desirable and necessary,” he said.

Athena’s Starkey indicated that the TFF could have the same impact as the regulatory responses to the GFC that focused on protecting the major banks, and contributed to a decline in the market presence of non-banks.

In the months leading up to the GFC non-banks accounted for around 30 per cent of home lending activity in Australia, but this plummeted to around 10 per cent three years later.

“Ultimately Aussie families were the losers from the reduction in competition,” Starkey said.

The Morrison government’s initial response to the COVID-19 crisis was to establish the Structured Finance Support Fund to provide ostensible support for non-bank lenders.

However, the rates charged for these funds were at least seven time more expensive than the 25 basis points the banks are charged for drawdowns on the TFF.

Sounds absolutely right. But should we care? Credit costs can’t get any lower so so what?

David Llewellyn-Smith
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