Bailout fund does the big banks plenty of favours

Anybody keen for a loan of $380 billion at, let’s say, an interest rate of 3.4 per cent? Sounds nice, eh? Well, you the taxpayer are in the process of making such a loan. Or at least you will soon extend, most kindly if as yet unwittingly, such a credit facility to the big banks, to be used at any time, at their discretion.

Taxpayers already guarantee 60 per cent of bank funding via the deposits guarantee for zero compensation. Yes, it is exceptionally generous, the so-called Committed Liquidity Facility, which is in effect a permanent bailout facility that comes into play in 2015. Christopher Joye, director of Yellow Brick Road Funds Management, makes the point that this massive line of credit is unusual and generous by global banking standards and it has been established with ”no public debate”.

”Smaller building societies and credit unions are not subject to the liquidity tests and will not, therefore, have access to the bailout fund,” Joye writes in the Financial Review.

To put this in perspective, bank loans to small businesses now average 8.45 per cent. Secured by the business person’s residential property, they are priced at 7.6 per cent. The average mortgage holder is forking out 5.65 per cent fully discounted.

Yet the biggest businesses in Australia – Commonwealth Bank, Westpac, NAB and ANZ – will be able to trot down to the Reserve Bank, lodge a bunch of their own loans – car loans if they like – and march off with billions at the bargain-basement interest rate of 3.4 per cent for 12 months or more.

The wholesale funding guarantee – with its prejudicial pricing in favour of the big four – is still in play until 2015 and, now, we have the mother of all bailout funds.

If any other business in the country can’t meet its obligations it has to render itself insolvent. But the banks can just shimmy on down to the RBA, chuck a bit of collateral over the counter and romp off with a few lazy billion at the cash rate plus 25 basis points and another 15 basis points.

That is indeed nice work if you can get it. Nobody would disagree that Australia should have a strong banking system. Most agree, grudgingly, that the country has been well-served by its banks.

But where is the debate on this issue? Where is the debate about ”moral hazard”? Why should the banks pay any heed to the disciplines of risk whatsoever if they have no chance of going bust but are nonetheless hardly paying for the privilege of community support?

Does this country have the most generous support mechanisms for banks in the world? The answer would appear to be yes.

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