The RBA is trying to un-stick a market gummed up by coronavirus fear – but there’s only so much it can do

Since Friday, the Reserve Bank of Australia has thrown almost $15bn into credit markets in a bid to get them moving again.

And there’s plenty more where that came from.

Amid stockmarket mayhem on Monday, the RBA made it clear it was ready to spend up big – no number has yet been set – by buying government bonds, injecting Australia’s banks with the cash craved by executives running scared because of the coronavirus pandemic.

The RBA’s capacity to buy bonds is almost unlimited because it can – and does – literally print money.

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When the central bank buys bonds outright it simply credits the payment into the accounts banks hold with it.

How much cash it is willing to create will be revealed in the next few days when the RBA tells the market how much it is prepared to lay out on buying bonds.

The bond purchases are on top of what the RBA calls “market operations”, where the central bank agrees to buy assets – anything from government bonds to bundles of home mortgages – from banks and then sell them back later at a discount.

It is in these market operations that the RBA spent $8.8bn on Friday and another $6bn on Monday, well above the usual range of between $500m and $3bn a day.

Illustrating the banks’ hunger for cash, on Monday the RBA said it was prepared to buy at least $2.5bn worth of assets.

Central banks around the world have been doing the same thing, as well as cutting rates to even lower levels, as they try to keep credit flowing.

They would be well aware that a credit crunch was the harbinger of the 2008-09 global financial crisis.

The bank isn’t keen on calling what it announced on Monday “quantitative easing”, even though buying bonds is exactly what quantitative easing means.

This is because when they do quantitative easing, central banks usually trumpet it from the rooftops because they are trying to bolster bond returns.

In this case, the RBA is more interested in un-gumming a market glued up by fear.

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The problem isn’t that Australia’s big banks don’t have any money. Bankers and analysts say they have plenty of capital, in part because over the past few years they have been forced by the prudential regulator to hold more and more.

Instead, the issue has been that, because of the crisis, they only want to hold assets that are either cash or can be instantly turned into cash.

Government bonds, however, pay returns over years or decades.

In normal times this doesn’t matter as much because there is a lively market in which banks and other investors trade bonds. It is this market that has frozen over.

Showing how banks have been hoarding money, the balances they hold in their accounts with the RBA soared on Friday to about $11bn more than they are required to keep with the central bank to cover payment system obligations.

That balance is normally around $2bn. Banks have a strong incentive not to hold too much money in the RBA strongbox – it pays the worst interest rate going around, of 0.25 points below the official rate.

With official rates at 0.5%, that means the banks are getting just 0.25% – and if the RBA cuts rates again to 0.25%, as markets predict, they will get a big fat zero.

At a meeting with regulators – including the RBA – on Tuesday or Wednesday, the commercial banks will also be looking for help dealing with their loan books.

The banks have all agreed to give businesses extra time to make repayments, or help them restructure their loans to help them through the cashflow crisis many are suffering.

They will probably ask regulators to waive regulations that make that harder or slower.

Nonetheless, analysts predict bad debts will balloon because of the virus crisis, to as much as $4bn over the next three years.

The next risk for banks is that the crisis currently smashing their small and medium-sized business customers will leak into home loans.

This is where the RBA’s market interventions might become ineffective.

All the big four banks are heavily reliant on lending to Australians who have bought into the country’s ever-buoyant property market.

If large numbers of people lose their jobs and can’t make home loan repayments, the banking system will come under extreme stress.

The Australian economy avoided a housing crash in the GFC, in part through the Rudd government’s cash splash to ordinary workers.

So far, the Morrison government has resisted that move.

But, as RBA governor Phillip Lowe has repeatedly said, there is only so much the central bank can do on its own.

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