Reserve Bank of Australia cuts its cash rate, says it's prepared to buy federal government and state government securities, and is establishing a facility to offer three-year funding to ADIs

The Reserve Bank of Australia (RBA) has cuts its cash rate by 25 basis points to 0.25% and announced plans to buy government securities and a facility to support lending to Australian businesses.

This is in response to the economic and financial impact of the coronavirus crisis.

Included in the RBA moves is a three-year funding facility to authorised deposit-taking institutions (ADIs), primarily banks,  at a fixed rate of 0.25%. ADIs will be able to obtain initial funding of up to 3% of their existing outstanding credit. They will have access to more funding if they increase lending to business, especially to small and medium-sized businesses. This facility is for at least A$90 billion, the RBA says. 

The Australian Government has also developed a program of support for the non-bank financial sector.

Meanwhile the Australian Prudential Regulation Authority (APRA) has told banks they may need to use some of their current large capital buffers to facilitate ongoing lending to the Australian economy.

Below are three statements issued by the RBA and one from APRA.

Statement by Philip Lowe, Governor: Monetary Policy Decision

The coronavirus is first and foremost a public health issue, but it is also having a very major impact on the economy and the financial system. As the virus has spread, countries have restricted the movement of people across borders and have implemented social distancing measures, including restricting movements within countries and within cities. The result has been major disruptions to economic activity across the world. This is likely to remain the case for some time yet as efforts continue to contain the virus.

Financial market volatility has been very high. Equity prices have experienced large declines. Government bond yields have declined to historic lows. However, the functioning of major government bond markets has been impaired, which has disrupted other markets given their important role as a financial benchmark. Funding markets are open to only the highest quality borrowers.

The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary and fiscal policy, play an important role in reducing the economic and financial disruption resulting from the virus.

At some point, the virus will be contained and the Australian economy will recover. In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly.

At a meeting yesterday, the Reserve Bank Board agreed to the following comprehensive package to support the Australian economy through this challenging period:

A reduction in the cash rate target to 0.25 per cent.

The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.

A target for the yield on 3-year Australian Government bonds of around 0.25 per cent.

This will be achieved through purchases of Government bonds in the secondary market. Purchases of Government bonds and semi-government securities across the yield curve will be conducted to help achieve this target as well as to address market dislocations. These purchases will commence tomorrow. The Bank will work closely with the Australian Office of Financial Management (AOFM) and state government borrowing authorities to ensure the efficacy of its actions. Further details about the implementation of this are provided in the accompanying notice.

A term funding facility for the banking system, with particular support for credit to small and medium-sized businesses.

The Reserve Bank will provide a three-year funding facility to authorised deposit-taking institutions (ADIs) at a fixed rate of 0.25 per cent. ADIs will be able to obtain initial funding of up to 3 per cent of their existing outstanding credit. They will have access to additional funding if they increase lending to business, especially to small and medium-sized businesses. This facility is for at least $90 billion. Further details are available in the accompanying notice.

The Australian Government has also developed a complementary program of support for the non-bank financial sector, small lenders and the securitisation market, which will be implemented by the AOFM.

Exchange settlement balances at the Reserve Bank will be remunerated at 10 basis points, rather than zero as would have been the case under the previous arrangements.

This will mitigate the cost to the banking system associated with the large increase in banks' settlement balances at the Reserve Bank that will occur following these policy actions.

The Reserve Bank will also continue to provide liquidity to Australian financial markets by conducting one-month and three-month repo operations in its daily market operations until further notice. In addition, the Bank will conduct longer-term repo operations of six-month maturity or longer at least weekly, as long as market conditions warrant.

The various elements of this package reinforce one another and will help to lower funding costs across the economy and support the provision of credit, especially to small and medium-sized businesses.

Australia's financial system is resilient and well placed to deal with the effects of the coronavirus. The banking system is well capitalised and is in a strong liquidity position. Substantial financial buffers are available to be drawn down if required to support the economy. The Reserve Bank is working closely with the other financial regulators and the Australian Government to help ensure that Australia's financial markets continue to operate effectively and that credit is available to households and businesses.

Today's policy package from the Reserve Bank complements the welcome fiscal response from governments in Australia. Together, these measures will support jobs, incomes and businesses through this difficult period and they will also assist the Australian economy in the recovery.

Here's the second statement.

Reserve Bank purchases of government securities

Starting Friday 20 March 2020, the Reserve Bank is prepared to purchase Australian Government securities (AGS) and securities issued by the state and territory central borrowing authorities (semis) in the secondary market consistent with the objectives as set out in the Governor's Statement of 19 March 2020.

The Bank will undertake multi-price auctions for government securities. The size and composition of purchases will be determined subject to market conditions and will vary across auctions.

Announcements

The Reserve Bank will announce its intentions for government securities purchases at 11.15 am (AEST/AEDT) on the day of purchase via Yieldbroker DEBTS. The announcement will indicate the total face value (AUD) and specific securities the Reserve Bank is willing to purchase, the time within which offers are to be submitted (from 3.25 pm to 3.30 pm AEST/AEDT) and the settlement date (T+2).

A less detailed notification of the operation will also be provided via the market data services (Reuters – RBA27; Bloomberg – RBAO8) at the same time.

Eligible Counterparties

All RITS members deemed eligible to participate in the Reserve Bank's domestic market operations may participate in the AGS auctions (see Eligible Counterparties).

Offers

Offers are to be made over Yieldbroker DEBTS.

Offers are to be made in absolute yields in quarter basis point increments, with a minimum offer of $5 million face value and increments of $1 million.

Participants who encounter difficulties in submitting their offers over that system should directly contact Yieldbroker DEBTS and also inform the Reserve Bank's Domestic Markets Desk by email.

Offers cannot be submitted, changed or withdrawn after the cut-off time for submissions has passed.

Notification

All participants will be notified promptly of the success or otherwise of their offers via Yieldbroker DEBTS.

Aggregated results will be published on market data services (Reuters – RBA28; Bloomberg – RBAO8) shortly after the auction, and in Statistical Table A3 on the Reserve Bank website. These include the issuer and series, face value and weighted average and cut-off yields for each security purchased. No information regarding the identities of the Reserve Bank's counterparties will be made public.

Securities Lending

The Reserve Bank stands ready to lend securities against AGS and semis (i.e. general collateral) at market rates on a reverse enquiry basis.

And here's the third statement.

Term funding facility to support lending to Australian businesses

Objectives

The Reserve Bank is establishing a facility to offer three-year funding to authorised deposit-taking institutions (ADIs). The facility has two objectives:

1. to reinforce the benefits to the economy of a lower cash rate, by reducing the funding costs of ADIs and in turn helping to reduce interest rates for borrowers. It will complement the reduction in funding costs from the Reserve Bank's target for three-year Australian Government bond yields
2. to encourage ADIs to support businesses during a difficult period, ADIs will have access to additional low-cost funding if they expand their lending to businesses over the period ahead. The scheme encourages lending to all businesses, although the incentives are stronger for small and medium-sized enterprises (SMEs).

ADIs are encouraged to consider taking advantage of this scheme to support their customers and help the economy through a difficult period.

This notice sets out the main features of the Term Funding Facility (TFF).

Eligibility

All ADIs that extend credit are eligible to participate in the TFF.

To access the scheme ADIs must have the capacity to deliver eligible collateral to the Reserve Bank. To do this, they need to be members of the Reserve Bank Information and Transfer System (RITS) and Austraclear (the central securities depository used by the Reserve Bank in its domestic market operations). Over 130 ADIs already satisfy these requirements and therefore should be operationally ready to participate in the TFF. Other ADIs can apply to become RITS members to enable them to participate (for more information, see RITS Membership).

The Australian Government has also developed a complementary program of support for the non-bank financial sector, small lenders and the securitisation market, which will be implemented by the AOFM.

Eligibility and continued access to the TFF will also be dependent upon ADIs acting, in the opinion of the Reserve Bank, in good faith and in a manner consistent with the objectives of the TFF.

Term

The term of the funding provided under the TFF will be for three years for each drawing by an ADI.

Participants may terminate any usage of the TFF, in part or in full, before its maturity date, in accordance with the procedures that will be published by the Reserve Bank.

Interest rate

The TFF will provide funding to ADIs at an interest rate of 25 basis points, fixed for the term of the funding.

Interest will accrue on the funding provided under the TFF and will be due at maturity or when the usage of the TFF is terminated.

Funding Allowance

Participants in the TFF may access funding up to their Funding Allowance. In aggregate, ADIs will have access to at least $90 billion under the TFF. The Funding Allowance for each participant is equal to an Initial Allowance plus an Additional Allowance.

The Initial Allowance will be set at 3 per cent of a participant's Total Credit Outstanding to Australian resident households and (non-related) businesses, measured as the average of the participant's total credit in the three months ending 31 January 2020.

The Additional Allowance is equal to the sum of the following:

1. one times the dollar increase in Large Business Credit Outstanding from the three months ending 31 January 2020 through to the three months ending 31 January 2021 (if there is a decline in Large Business Credit Outstanding, then this is zero)
2. five times the dollar increase in SME Credit Outstanding from the three months ending 31 January 2020 through to the three months ending 31 January 2021 (if there is a decline in SME Credit Outstanding, then this is zero).

The Additional Allowance available to be accessed will be updated each month during this period, following the receipt of the most recent data on Large Business and SME Credit Outstanding, using the average of the most recent three months of data in the calculations above. The final update will follow the receipt of the data for 31 January 2021.

ADIs will be able to start using the TFF no later than 16 April 2020. Note that, under the terms above, ADIs that expand their business credit even ahead of this date will benefit from a larger Additional Allowance.

Participants will be able to draw down their Initial Allowance until end September 2020. They will be able to draw down their Additional Allowance until end March 2021. Funding can be accessed on business days in Sydney or Melbourne (RITS settlement days) during this period. ADIs can make multiple drawings under the TFF up to the limit of their Funding Allowance.

If the Funding Allowance for an ADI declines below the amount that the ADI has drawn under the TFF, then the ADI would be required to reduce the amount of funding they have drawn back to (or below) the Funding Allowance.

The Reserve Bank will publish data on aggregate usage of the TFF on an end-month basis, with a one-month lag.

Credit measures used to calculate the Funding Allowance

The quantity of funding available under the Initial Allowance will be calculated by the Reserve Bank based on the ADI's Total Credit Outstanding (loans, finance leases and bill acceptances) to Australian resident households and (non-related) businesses; credit extended to non-residents will be excluded. ADIs with Credit Outstanding of over $200 million report these data on the 720 suite of APRA reporting forms (ARF 720).

The quantity of funding available under the Additional Allowance will be calculated by the Reserve Bank based on the ADI's Business Credit Outstanding to Australian resident (non-related) businesses, comprising (a) Large Businesses (businesses with turnover of $50 million or more) and (b) SMEs (businesses with turnover below $50 million). Business Credit Outstanding includes both lending to corporate and unincorporated businesses. ADIs with Business Credit Outstanding of over $2 billion report these data to APRA on ARF 742.

ADIs that do not report on ARF 720 and/or ARF 742 will need to provide data to the Reserve Bank in order to be eligible for the Funding Allowance. These data must include Total Credit Outstanding as at 31 January 2020 to enable the Reserve Bank to calculate the Initial Allowance. In addition, these data must include Business Credit Outstanding disaggregated into SME Business Credit Outstanding and Large Business Credit Outstanding, as at 31 January 2020 and going forward on at least a quarterly frequency, to enable the Reserve Bank to calculate the Additional Allowance.

The Credit Outstanding data provided by an ADI to APRA or the Reserve Bank must be the product of systems, processes and controls that have been reviewed and tested by an external auditor of the ADI. The Reserve Bank reserves the right to require independent audits of the Credit Outstanding data provided to APRA or the Reserve Bank at any time. The Reserve Bank will confirm details of audit requirements in due course.

Eligible collateral

Funding under the TFF will be extended by the Reserve Bank to ADIs under repurchase transactions (repo).

Eligible collateral will consist of all collateral currently eligible for the Reserve Bank's domestic market operations. For more details, see Eligible Securities. This will include self-securitised asset-backed securities.

The Reserve Bank will apply haircuts (including through Margin Ratios) to the collateral, as set out on the Reserve Bank's website from time to time. For more details on the haircuts that apply to the Reserve Bank's existing facilities, see Margin Ratios. The Reserve Bank may apply different haircuts to collateral under the TFF. The Reserve Bank has discretion to vary its haircuts at any time.

Legal and operational details

The terms of the TFF can be revised by the Reserve Bank at any time, and this announcement is indicative only. The legal and operational details of the scheme will be published before 16 April 2020. Usage of the TFF will be at the sole discretion of the Reserve Bank.

And here's APRA's statement.

APRA adjusts bank capital expectations

The Australian Prudential Regulation Authority (APRA) today announced temporary changes to its expectations regarding bank capital ratios, to ensure banks are well positioned to continue to provide credit to the economy in the current challenging environment.

Over the past decade, the Australian banking system has built up substantial capital buffers. The highest quality form of capital, Common Equity Tier 1 (CET1) capital, reached $235 billion at the end of 2019. As a result, banks are typically maintaining capital levels well above minimum regulatory requirements.

In 2017, APRA set benchmark capital targets for banks to enable them to be regarded internationally as unquestionably strong (which was a recommendation of the 2014 Financial System Inquiry). These benchmarks are well above current minimum regulatory requirements. For the four major banks, for example, this benchmark equated to having a CET1 ratio of at least 10.5 per cent of risk-weighted assets. A lower benchmark applies for smaller banks.

In comparison, the actual CET1 ratio of the banking system by the end of 2019 had reached 11.3 per cent. APRA is advising all banks today that, given the prevailing circumstances, it envisages they may need to utilise some of their current large buffers to facilitate ongoing lending to the economy. This is especially the case for banks wishing to take advantage of new facilities announced today by the Reserve Bank of Australia to promote the continued flow of credit.

Provided banks are able to demonstrate they can continue to meet their various minimum capital requirements, APRA would not be concerned if they were not meeting the additional benchmarks announced in 2016 during the period of disruption caused by COVID-19.

APRA Chair Wayne Byres said: “APRA has been pursuing a program to build up the financial strength of the system for many years, when banks had the capacity to do so. As a result, the Australian banking system is well-capitalised by both historical and international standards.

“APRA’s objective in building up this capital strength has been to ensure it is available to be drawn upon if needed in times such as this. Today’s announcement reflects the underlying strength of the system: even if the banking system utilises some of its current large buffers, it will still be operating comfortably above minimum regulatory requirements,” Mr Byres said.