Big bailout or big grift?

The Big Four banks are profiteering from the Reserve Bank’s bail-out fund by betting on their own bonds. Michael West investigates a very quiet scandal that is the Committed Liquidity Facility.

3 September 2021 | Michael West, MW Media (Image: Marcus Reubenstein)

The Reserve Bank set up a “bail-out fund” for the banks during the Global Financial Crisis ten years ago.

They hate that name, “bail-out fund”. They prefer words like Committed Liquidity Facility (bail-out fund) whose LCR (rules) ensures ADIs (banks) maintain sufficient unencumbered HQLA (enough bonds) to survive a severe liquidity stress scenario (meltdown)”.

You get the picture – a bail-out fund it is.

Unlike other businesses, if the banks get into strife, they will be rescued. The rest of us have to own our own risks, we can go bust; whereas the banks’ risks are owned by us, they won’t go bust.

The argument is that the bail-out fund – actually called the Committed Liquidity Facility – lends stability to the banking system, and there is a solid case for this. There is also a lot to the fact that being underpinned by taxpayers means they are quasi public institutions, mollycoddled, not entirely private, sort of half-way, privatising their profits, socialising their losses.

Thanks to the pandemic and the JobKeeper hand-outs, we now know that dozens, if not hundreds of large private institutions, are too big to fail, but that’s another story, another story of corporate welfare, of inequality, of gaping double standards now exacerbated by the pandemic.

In any case, the urgency of having to have a bail-out fund for the banks has now gone. That’s because Australia did not have much debt during the GFC. Debt being bonds. But we now have record debt, a $1.5 trillion bond market. Bonds are deemed liquid assets (or HQLA as above), which means you can flog them any time, cash up in times of crisis.

This brings us to the rort. What is in this CLF, this bail-out fund? Roughly 80% of it contains banks’ internal loans, home loans, which are not really liquid. The other 20% of it is the banks’ own bonds, promises they have issued in return for cash from investors, money which they owe and which they have to pay back at some point.

When National Australia Bank had its recent bond issue some 67% of it was snapped up by the other big Aussie banks. One of the other major banks is believed to have bid for more than $500m of it.

As far as we are aware, no other country in the world allows their banks to buy other banks’ bonds and count them as liquid assets. Other central banks insist on federal government bonds, or sovereign debt.

Herein lies the rort. As the banks are leveraged, or geared up, they make 15% returns on their home loans. And because their own bonds are higher risk and higher return than sovereign bonds, they make terrific returns on these as well.

Therefore it is not too far from the mark for cynics to use rude words like Ponzi is relation to the banks because – rather than keeping safe Commonwealth bonds in their bail-out fund –  they are effectively using other people’s money – and newly created money via QE – punting their own higher risk bonds and home loans at a time of record house prices and record household debt.

A tidy little earner

So what do we have? We have the Big Four banking oligopoly loading up with a whole lot of debt, sticking high-risk assets into what is meant to be the bedrock of security for Australia’s financial system and profiteering from it via a quasi-Ponzi scheme. Let’s not forget that besides punting each other bonds they also are the biggest equity investors in each other.

If you look at the share registers of the majors, they are all top shareholders in their rival banks. 

There is a more precise, technical explanation of this racket by bond investor and finance commentator Chris Joye here. Joye describes it as “banks gouging taxpayers by arbitraging global liquidity rules”.

Nobody else seems to be onto it at this point but you can be fairly assured that APRA and the RBA are onto it and will probably move soon to address the rort. ANZ has taken the initiative already to reduce its CLF exposure by $30 billion and holding Commonwealth bonds as security.

For comparison, ANZ holds $220 billion of government bonds and Westpac has $120 billion.

Does all this hit home loans via higher rates? Perhaps not, but it does hit the poor old beleaguered taxpayers, again. Because, if the banks held fewer bonds in each other, and more Commonwealth bonds, as security, that would mean the Government could borrow at lower rates because there would be more demand for their bonds.

The bail-out fund has been a tidy little earner. Stay tuned!

This article was first published by MW Media, Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.