RDP 2022-07: The Term Funding Facility: Has It Encouraged Business Lending? 2. Policy Design and Background

2.1 Overview of the TFF

The TFF was available to all authorised deposit-taking institutions (‘banks’) that extend credit. This included more than 130 Australian banks, credit unions and building societies, as well as foreign bank branches and subsidiaries operating in Australia. The facility enabled these institutions to access three-year funding at a fixed rate that was well below their cost of wholesale market funding at the same term. The value of funding available was sizeable, ensuring that the facility had a sizeable influence on participating banks' cost of funds.

The price and amount of funding varied throughout the pandemic. The TFF initially gave banks access to three-year funding at a cost of 0.25 per cent, with:

  • an initial allowance equivalent to 3 per cent of each bank's total credit outstanding;[2] banks could access their initial allowance until 30 September 2020.
  • an additional allowance, which was initially available until 31 March 2021 to any bank that expanded its business credit, with greater incentives for lending to SMEs. Banks were granted one dollar of additional allowance for every dollar increase in the stock of lending to large businesses, and five dollars of additional allowance for every dollar increase in lending to SMEs. Banks that reported a decline in SME or large business credit received no additional allowance for that category.

The RBA subsequently made a number of adjustments to the TFF in response to changes in economic and financial conditions:

  • In September 2020, the TFF was expanded with a new supplementary allowance for each bank equivalent to 2 per cent of its credit outstanding, available to be drawn between 1 October 2020 and 30 June 2021. Also, the period for drawdowns of the additional allowance was extended by three months to 30 June 2021.
  • In November 2020, the cost of new funding under the TFF was lowered to 0.1 per cent in line with reductions in the cash rate target and 3-year government bond yield target.

The price of the TFF was set at a low level to ensure it was attractive to banks. Initially set at 25 basis points and then reduced to 10 basis points in November 2020, the TFF was much cheaper than 3-year wholesale funding for major banks throughout the drawdown period (Figure 3). The cost differential was even greater for non-major banks, who typically have higher costs of funding due to lower credit ratings.

Figure 3: Cost of Major Banks' Funding Sources
Three-year funding, marginal, RBA estimates
Figure 3: Cost of Major Banks' Funding Sources

Notes: (a) Adjusted for cross-currency hedging.
(b) Covered bonds trade at yields on average about 5 basis points below senior unsecured (domestic) bonds since 2019, but this has varied over time. Through 2020 and 2021, this difference fell to 1 basis point on average, but ranged between 14 basis points above and 40 basis points below senior unsecured (domestic) bonds.

Sources: Bloomberg; RBA

To minimise risk to the RBA, banks were required to pledge high-quality collateral to access the TFF, in line with the RBA's collateral policy.[3] The most attractive collateral for banks to use were self-securitisations, which are notes backed by loans already on the banks' balance sheets. By pledging self-securitisations, banks could avoid the need to fund the acquisition of other collateral. Indeed, self-securitisations constituted over 90 per cent of collateral pledged for the TFF by value.

2.2 The additional allowance

The additional allowance, an area of focus for this paper, was designed with the explicit aim of encouraging banks to increase lending to businesses, particularly SMEs. The additional allowance was updated monthly throughout the TFF drawdown period. The final value of the additional allowance was calculated as the sum of:

  • 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).
  • The larger of:
    • 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).
    • 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 final value of each bank's additional allowance was determined after the end of April 2021, using the average of the most recent three months of data in the calculations above, and could be drawn until the end of June 2021.[4]

2.3 TFF take-up and business lending through the pandemic

The TFF was announced in March 2020 and was available to access in early April. TFF drawdowns increased only gradually, ramping up in advance of the first deadline of end September 2020. Similarly, drawdowns again increased in the lead-up to the final deadline of end June 2021. By drawing on the TFF close to the deadline dates, banks could push back the time the debt matured.

In aggregate, banks drew down 88 per cent of the total funding available from the facility (Figure 4). Overall, 92 banks accessed the TFF – 41 banks were eligible but did not access the facility, although these lenders accounted for less than 5 per cent of allowances by value.

Figure 4: Term Funding Facility
Figure 4: Term Funding Facility

Note: (a) Includes allowances for eligible banks who did not access the facility.

Sources: APRA; RBA

The size of additional allowances varied over time, reflecting changes in each bank's business credit outstanding. Starting in March 2020, businesses turned to banks for access to liquidity (Kohler 2021; Johnson, Lane and McClure 2022). Facing a period of uncertainty and a potential decline in cash flow, some businesses drew down existing lines of credit and some sought higher credit limits as a precaution. These firms generally repaid these facilities within a couple of months. Total lending to businesses was approximately steady for much of the rest of the TFF drawdown period, although aggregate lending to large businesses increased in mid-2021 as economic conditions improved. Meanwhile, aggregate lending to SMEs was little changed. Nevertheless, additional allowances increased over the last few months of the TFF, driven by a number of banks that increased their business lending, particularly to SMEs. Consistent with this, the bulk of additional allowances available in June 2021 were accrued due to increases in SME lending by some banks.

Since SME lending was little changed throughout the pandemic, it is likely those banks that increased their business lending, and hence gained an additional allowance, did so by winning customers from other banks. SME loan refinancing activity was higher in 2020/21 compared with the year prior, despite the stock of SME lending being little changed over the drawdown period. This activity would not necessarily lead to an increase in aggregate business lending, although this refinancing activity is likely to have benefited SMEs, which could have achieved lower interest costs or improved lending terms.

In aggregate, businesses' demand for debt was weak throughout 2020 and early 2021. Business appetite to borrow was likely suppressed by the weakness in economic activity and a heightened level of uncertainty around the outlook (Black, Lane and Nunn 2021). At the same time, businesses received sizeable government support via initiatives such as JobKeeper, which boosted their cash flow, reducing the need for credit. Survey data and liaison with businesses suggested that SMEs, in particular, had little appetite for taking out new loans. In part, this reflected ongoing uncertainty about the economic outlook, with SMEs disproportionately affected by the COVID-19 pandemic as they were more likely to operate in industries harder hit by lockdowns. These factors pose challenges to identifying the effect of the additional allowance on SME lending, as described in Section 5.

As at the end of June 2021, the final value of available additional allowances was around 7 per cent of business credit, or 34 per cent of total TFF allowances (Figure 5). The banks that had access to additional allowances generated $26 billion in new lending to large businesses and $9 billion to SMEs.

Figure 5: TFF Allowances
Figure 5: TFF Allowances

Notes: Total TFF allowances for 133 eligible banks as at the end of each month. In contrast to the initial and supplementary allowances, the additional allowance varied over the life of the TFF, depending on each bank's increase in lending to businesses.

Sources: APRA; RBA


The size of the initial allowance was 3 per cent of credit before the outbreak of COVID-19. For banks reporting data on a monthly basis, this figure was based on the average of three months ending 31 January 2020; for banks reporting quarterly, the quarter ending 31 December 2019 was used. [2]

In contrast to repo funding available through the RBA in open market operations, banks could post self-securitisation notes as collateral for the TFF. Self-securitisation notes are structured pools of assets, such as their own residential mortgages, created by banks specifically to use as collateral to access liquidity from the RBA. The RBA accepts self-securitisations by banks to access liquidity through standing facilities, exceptional liquidity assistance and the TFF only. [3]

Whereas a bank's additional allowances varied with growth in their business credit during the drawdown period for the TFF, the value of each bank's additional allowance was fixed after the end of April 2021. As a result, a bank cannot be overdrawn in respect of their additional allowance due to a decline in their business credit outstanding after the end of the final reporting period. [4]