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:

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
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:

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)
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.

Reserve Bank of Australia
19 March 2020