Australia gave banks $1 per SME dollar lent

In March 2020 the Reserve Bank of Australia launched the Term Funding Facility as wholesale funding markets seized up and the outlook darkened. Cheap, three-year funding for banks was the headline, but the design had a sharper edge: the amount a bank could borrow grew with its lending.

The initial allowance equalled 3% of a bank's total credit outstanding, later expanded, and the drawdown window stretched out. The clever part was the additional allowance: one dollar of new funding per dollar of additional business lending, and five dollars per dollar of additional SME lending. This made the facility skew hard toward small business, the segment that loses credit first in a downturn.

By tying allowance to SME lending relative to a pre-pandemic baseline, the Bank incentivised the specific behaviour it wanted rather than relying on cheap money to trickle down.

Bonus credit for targeted lending

The additional allowance rewarded SME lending five-to-one, the segment most vulnerable to credit squeezes

A fixed, pre-announced rate gave banks and borrowers certainty about costs

Banks could defer drawdowns, so the facility worked as insurance against wholesale-market disruption

It lowered funding costs directly for banks and indirectly for non-bank lenders via close substitutes

When you want a specific kind of lending, attach the reward to that lending's growth, so the marginal dollar carries the incentive.

Banks drew roughly A$188–199 billion and the facility closed in mid-2021. Assessments found it materially cut lending rates for households and businesses, though the extra SME-lending allowance had a more modest, uneven effect and drew some criticism about use of the cheap funding.