Banks To Fund Government Stimulus Bill (AFR)

Banks will be directed by financial regulators to buy up to $240 billion of additional federal and state government debt to normalise emergency bank liquidity, in a regulatory move that will lower government borrowing costs and encourage stimulus spending on infrastructure and other programs. The primary objective of the yet-to-be-announced shift by the Australian Prudential Regulation Authority and Reserve Bank of Australia will be to enhance bank stability in line with international rules so banks continue to withstand periods of financial stress. But a consequence and second-order goal of the financial policy shake-up will be lower Commonwealth and state government interest rates as banks buy more government bonds instead of holding private sector bank bonds and residential mortgage backed securities (RMBS). The adjustment would help governments, particularly states, fulfil RBA governor Philip Lowe's pleas to seize on ultra-low interest rates to fund job-creating programs such as infrastructure projects.

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