Term Funding Facility – Reduction in Interest Rate to Further Support the Australian Economy

The Term Funding Facility (TFF) was announced in March 2020 as part of a comprehensive policy package to support the Australian economy in the face of economic and financial disruptions resulting from the COVID-19 pandemic. The TFF provides a source of low-cost funding for the banking system with funding available for three year terms. This helps to support the supply of credit and lower interest rates for borrowers. The TFF also provides an incentive for authorised deposit-taking institutions (ADIs) to increase their lending to businesses, especially small and medium-sized enterprises (SMEs), with an additional funding allowance linked to growth in business lending. In September 2020, the TFF was expanded with the introduction of a new supplementary allowance available from October 2020. By 3 November, ADIs had drawn $83 billion under the TFF.

The Reserve Bank is now providing further support to lending and low interest rates by reducing the interest rate on new drawdowns under the TFF. The interest rate on new drawdowns under the TFF is reduced to 0.1 per cent per annum, effective from 4 November, down from 0.25 per cent previously. All other parameters of the TFF remain unchanged.

ADIs can access three year funding at the fixed rate of 0.1 per cent under the additional and supplementary allowances until 30 June 2021. The interest rate on existing drawdowns under the initial allowance, which closed to new drawdowns on 30 September 2020, will remain at 0.25 per cent. Further details are available in the Operational Notes.

The remainder of this notice recaps the main features of the TFF with updates to incorporate the reduction in the TFF interest rate.

Objectives

The Reserve Bank established the TFF to offer low-cost three-year funding to 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 complements the reduction in funding costs from the Reserve Bank's target for the three-year Australian Government bond yield
2. to encourage ADIs to support businesses during a difficult period, ADIs have access to additional low-cost funding if they expand their lending to businesses. The scheme encourages lending to all businesses, although the incentives are even stronger for small and medium-sized enterprises (SMEs).

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

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 satisfy these requirements and therefore should be able 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, implemented by the AOFM.

Eligibility and continued access to the TFF is 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 is 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 published by the Reserve Bank.

Interest rate

Prior to the Board's decision on Tuesday 3 November 2020, the TFF provided funding to ADIs at an interest rate of 25 basis points per annum, fixed for the term of the funding.

Following the Board's decision, from Wednesday 4 November 2020, the TFF provides new funding to ADIs at an interest rate of 10 basis points per annum, fixed for the term of the funding.

Interest accrues on the funding provided under the TFF and will be due at maturity or when a repo provided through the TFF is terminated.

Funding Allowance

Participants in the TFF may access funding up to their Funding Allowance. Their Funding Allowance is the sum of up to three components:

In the first phase of the TFF, between 6 April and 30 September 2020, the Funding Allowance for each participant was equal to an Initial Allowance plus an Additional Allowance.

In the second phase of the TFF, between 1 October 2020 and 30 June 2021, the Funding Allowance for each participant is equal to the sum of: any existing drawdowns against the Initial Allowance; a Supplementary Allowance; and an Additional Allowance.

The Initial Allowance is 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 for ADIs that report on the 720 suite of APRA reporting forms, or the quarter ending 31 December 2019 for ADIs that only report on the 323 APRA reporting form.

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 30 April 2021 (if there is a decline in Large Business Credit Outstanding, then this is zero)
2. the larger of:
   1. five times the dollar increase in SME Credit Outstanding from the three months ending 31 January 2020 through to the three months ending 30 April 2021 (if there is a decline in SME Credit Outstanding, then this is zero)
   2. five times the dollar increase in SME Credit Outstanding from 29 February 2020 to the three months ending 30 April 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 30 April 2021.

The Supplementary Allowance is set at 2 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 July 2020 for ADIs that report on the 720 suite of APRA reporting forms, or the quarter ending 30 June 2020 for ADIs that only report on the 323 APRA reporting form.

ADIs were able to start using the TFF from 6 April 2020. Under the terms above, ADIs that expanded their business credit even ahead of this date benefited from a larger Additional Allowance.

Participants were able to draw down their Initial Allowance until end September 2020. The Supplementary Allowance has been available from 1 October 2020. Participants can draw down their Additional and Supplementary Allowances until end June 2021. Funding can be accessed on business days in Sydney or Melbourne (RITS settlement days) during the drawdown period, except on the three business days between the Boxing Day and New Year's Day public holidays (Tuesday 29 to Thursday 31 December 2020 inclusive). TFF Repo requests will not be processed during this period, though settlement of contracted TFF Repos will still occur (i.e. for requests submitted and accepted prior to Tuesday 29 December 2020). 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, the Reserve Bank will require the ADI to reduce the amount of funding they have drawn back to (or below) the Funding Allowance.

The Reserve Bank publishes data on aggregate usage of the TFF on a weekly basis, and aggregate allowances on a monthly basis.

Credit measures used to calculate the Funding Allowance

The quantity of funding available under the Initial Allowance and Supplementary Allowance is 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 is excluded. ADIs with Credit Outstanding of over $200 million report these data on the 720 suite of APRA reporting forms (ARF 720). Smaller ADIs report these data on the 323 APRA reporting form (ARF 323).

The quantity of funding available under the Additional Allowance is 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 742 can provide data to the Reserve Bank in order to be eligible for the Additional Allowance. These data must include Business Credit Outstanding disaggregated into SME Business Credit Outstanding and Large Business Credit Outstanding for the three months to 31 January 2020 and going forward at a monthly frequency, or for the December quarter 2019 and going forward at 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.

Eligible collateral

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

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

The Reserve Bank applies 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. For more details see the Operational Notes. Usage of the TFF is at the sole discretion of the Reserve Bank.

Reserve Bank of Australia
3 November 2020