RDP 2022-07: The Term Funding Facility: Has It Encouraged Business Lending? 9. Conclusion

The TFF was introduced in March 2020 as part of a policy package in response to the onset of the COVID-19 pandemic. The facility reduced banks' funding costs and, along with other policies, contributed to lower borrowing rates for households and businesses; two key objectives of the TFF. This paper is focused only on the third objective of the TFF, which was to encourage banks to lend to businesses. Overall, we find no statistically significant effects of the TFF on bank credit growth for SMEs compared to large businesses, and mixed results when comparing aggregate business credit growth for TFF-eligible banks against ineligible non-banks. We also find no statistically significant effects on aggregate business credit growth for eligible banks that accessed the TFF compared to banks that did not draw down. We use a variety of strategies to estimate the effect of the TFF on business lending. Nonetheless, identification challenges remain, reflecting the fact that the TFF was introduced at the same time as a number of other policies and in response to the adverse effect the pandemic would have on the economy, potentially affecting the various lenders and borrowers in different ways.

Our first set of results rely on an assumption that large business credit growth would have been an appropriate counterfactual for SME credit growth in the absence of the TFF, but there are reasons why this assumption may not hold. For example, many SMEs operate in sectors that were more affected by COVID-19 restrictions and may have found it more difficult to access finance after the pandemic. Furthermore, survey data and liaison with businesses suggest that many businesses, particularly SMEs, had little appetite for taking out new loans throughout the pandemic, reflecting ongoing uncertainty about the economic outlook as well as a reduced need for finance due to government support measures and increased cash buffers (Bank and Lewis 2021).^[22] These factors may have biased our estimates downwards. While we attempt to address identification issues by using data at the bank and industry level, and by using a triple-difference framework, these strategies may not be sufficient to overcome the identification problems.

In addition, non-banks are not an ideal control in this period. While banks benefited from funding certainty provided by the TFF, non-banks were also being supported by the Structured Finance Support Fund. In addition, non-banks indirectly benefited from the take-up of the TFF, with the decline in bank bond issuance (largely owing to the TFF) contributing to a noticeable decline in spreads on ABS (Kent 2021b). Similarly, the decline in issuance also contributed to a decline in spreads on bank bonds. This benefited banks that did not access the TFF, complicating the comparison of their business lending with those that did draw on the facility.

This paper contributes to the growing literature studying the effect of term funding schemes implemented around the world. It is also, to the best of our knowledge, the first empirical study of the effects of the RBA's TFF on bank credit supply in Australia. Similar to our results, global evidence to date is mixed on the effectiveness of these features to promote lending to particular parts of the economy.

Footnote

Examples include Boosting Cash Flows for Employers, enhancements to instant asset write-off and the SME loan guarantee (Bank and Lewis 2021; Black, Kane and Lane 2021; Kent 2021a). [22]