Securitisation's shaky future
The chief executive of the Australian Securitisation Forum Chris Dalton tells Business Spectator's Tony Boyd:
Tony Boyd: Chris, it must be hard. You’re in charge of an organisation covering an industry that’s apparently dead. What do you say about that?
Chris Dalton: I think it’s a little premature, and probably incorrect, to say that securitisation is dead in Australia. It would be fair to say that we are at a crossroads at the present time, where the primary market is severely constrained in terms of issuance of particularly residential mortgage backed securities. But we’re looking to the continuation of Government support to get the industry through this tough period and bring back real private investors and increase issuance of residential mortgage backed securities.
TB: So, how much has the Australian Office of Financial Management supported the industry in the past 12 months?
CD: Look, we see the support through the Australian Office of Financial Management has been a very positive and important element of government support. It has allowed, particularly, the non-bank residential mortgage backed security issuers to continue lending at a reduced rate – which has meant that there’s been sort of an availability of funds in the market for residential home loans, outside of the major four banks and the regional banks. It’s been an important element to keep the infrastructure, if you like, of the non-bank residential mortgage market in place. It’s also been a very positive sign that’s been noticed and considered by overseas investors as they’ve looked at various overseas markets and particularly in the securitisation space.
TB: How much money have they put in and how much has come from private investors?
CD: Well, the government gave the AOFM an $8 billion investment kitty and they’ve currently spent around $6.25 billion and they’ve got commitments to another couple of programs that’ll be settled in July. Private investors have been enticed to come back into the market in the shorter dated tranches of the securities – typically, those tranches which will repay within nine to 12 months. So they’ve provided probably another billion dollars into the market in 2009.
TB: So, what will happen when the money runs out from the federal government?
CD: Well look, the risk is that if there is no further government support, or if there is not an announcement, I think we’ll go into a period of hiatus. And it will be quite difficult, particularly for the non-bank sector, to stay in business, if they don’t have availability of finance funding from the wholesale market. So I think it is at a crossroads in terms of needing a further period of time of support. There are some positive developments in the broader credit markets, where both yields have come in for many issuers. We’ve seen issuance by corporates into the corporate bond markets here and overseas, but securitisation is still under stress – and what we’re saying is, we’ll need support from the government for a period of up to 18 months, to get us through the current situation.
TB: So, we might need the government to invest another $12 billion in the securitisation market?
CD: Well, what the Australian Securitisation Forum has put to government, is that there are a number of options that they may consider. And that could be, as you say, an extension or an increase in the facility that the AOFM is currently operating under. It could be changing the eligibility criteria of the assets and the securities that they’re buying under that program. It could be a guarantee of the RMBS at the trust level, which is a development that’s been put in place in the United Kingdom. One of the issues for the Australian market is that the secondary market for securitised product RMBS has effectively diminished – and so the government could also consider providing some liquidity backstops and buybacks of securities in the secondary market to provide institutional investors more certainty and comfort about the ability to liquefy their investments and also the pricing of those investments in the secondary market.
TB: Your predecessor Greg Medcraft, who now works for ASIC, was a big supporter of the Canadian model for supporting securitisation. Why has the ASF abandoned that?
CD: Well, the ASF has taken the view that we believe that the market should find its own level after a period of government support. We believe that government has a role to play to facilitate markets, but not necessarily step into markets in a long-term, ongoing sense. And so we’re not advocating a Canadian mortgage core model, because that would be introducing a new structural feature to the Australian financial market. What we would prefer to see is the government support and assist the securitisation industry through this period, but do it in a way in which they can step away from – so it’s temporary or it’s transitory. We believe that what the government’s been doing, with guarantees of both banks and the state governments and the securitisation sector, is really been playing a risk management role. There’s been significant risk, there’s been significant volatility and uncertainty in financial markets over the last 12 months and, quite rightly, the Government stepped in to manage that risk. Whilst things have improved for the major banks (and they’ve been issuing on a non-guaranteed basis in recent times), the securitisation sector still hasn’t got the level of confidence in terms of the investor community, nor the level of activity to bring it back to a normal state.
TB: There was a securitisation conference in London last week. What feedback have you had about investor attitudes to Australian RMBS?
CD: Well, the pleasing feedback that we did receive, Tony, was that, you know, the European investors are very cognoscente of the fact that the Australian economy, at a macro level, is doing relatively well, compared with other OECD economies. The second thing is that the Australian property markets are sort of, holding up reasonably well in comparison, again, with European property markets (the UK and Spain in particular), and obviously what’s going on in the US with significant and substantial price declines. And thirdly, they already have invested over the last three to five years in Australian residential mortgage backed securities, and have seen that they have performed in a stellar fashion over the last 12 months. In fact, statistics show over the last two months that the level of arrears in those pools of mortgages has actually fallen. So, despite the fact that we are in near recessionary times in Australia and unemployment is increasing, the performance of these residential mortgage backed pools has been very good. So, the international investors in London are quite interested in the Australian market because they see the fundamentals being better than many other international markets. So they’re ready to come back in.
TB: I believe you’ve got some ideas on how to help the major banks reduce their reliance on wholesale funding from offshore. Can you just tell us what they are?
CD: Well, that’s right. The Australian Securitisation Forum represents all its constituents, and that includes the major banks. And we expect, in July, to release a discussion paper, arguing the case for allowing Australian banks and ADIs to issue what’s called covered bonds. These securities are a feature of most developed banking systems. Australia is one of two countries that don’t allow their banks to issue covered bonds, which are just a form of secured borrowing that is backed by a specific pool of mortgages on the bank’s balance sheet. The advantage is that it allows the securities to be rated more highly – potentially triple A, in Australia’s case – than an unsecured borrowing by the bank. The advantage, also, is that it will allow the banks to compete with their international peers on a level playing field, because they’ll be able to access all investment and funding markets. Because the investors in covered bonds are sort of a different class of investor, an international investor, to the typical buyers of unsecured bank paper. So, we see that, you know, in sort of, making sure that Australia has adequate access – and diversity of access – to funding for its banks, that covered bonds is an important innovation and development that should be seriously considered by the Government and the regulators – particularly APRA.
TB: What problem does APRA have with covered bonds? Why won’t it allow them?
CD: Well, at the present time, there’s an interpretation that, if you allow a class of borrowers to have the benefit of a pledge of assets or security over part of the bank’s balance sheet, that’s to the disadvantage of depositors; that under the Banking Act – the spirit of the Act and certainly, the regulators’ view is – the first claim on the assets of a bank should always be with the depositors. So, what the ASF position has proposed is a legislative change to, firstly, the Banking Act, and also the introduction of a new covered bond act – so that there’s clarity and certainty about the ranking of creditors, in the remote and unlikely situation of a liquidation of a bank’s assets.
TB: Now finally, I believe you’ve just lodged your response to the IOSCO [The International Organization of Securities Commissions] taskforce recommendations on unregulated financial products. What does your submission say?
CD: Yes. Well, that submission is on our website and I guess the key thing from the Australian securitisation market point of view, is that there’s a proposal that’s been put forward, that the originator or the sponsor of a securitised program should be required to retain a long term economic interest in the transaction. And this has been referred to as maintaining some ‘skin in the game’. I think it’s fair to say there’s been a very strong – if you like, angry – reaction from regulators around the world to some of the things that have gone on in financial markets with some of the unregulated products – particularly in Europe and, to a lesser degree, I think, in the United States. We have argued in our submission that, you know, a proposal to introduce a flat, blunt requirement to hold, say, 5 per cent of the economic interest in a transaction is ill advised. And what we want to have regulators recognise is that, firstly, the Australian securitisation model already has a fair degree of ‘skin in the game’ and secondly, that because securitisation can cut across and cover a number of asset classes, you need to look at the risk of each of those asset classes – and therefore, risk adjust what level of economic interest should be retained if you want to align the interests of both the originator, the service of those assets and then the end investor. It’s really a position arguing a risk-sensitive, a risk-adjusted approach to this, and not just a flat 5 per cent type requirement.
TB: And does ASIC agree with your position on that?
CD: The submission went in on Monday. We will be talking with ASIC as we have done over the last couple of months. They’ve been very open and transparent with some discussion meetings which they called to discuss the IOSCO recommendations. And so we would hope that we would have the opportunity to discuss, and argue, our case, before final recommendations are put in place. I think the Australian view – and I suspect this will be what ASIC will also support – is a principles based approach. We would like to see some principles adopted by IOSCO (which is the International Organisation for Securities Commissions) and allow the local regulators to then interpret and implement those in the local markets. Unlike America, which has had a history of introducing black-letter law to address regulatory matters, the Australian regulators, and Australia, have tended to operate more on a principles based approach. We think that’s sensible and we would like to work with ASIC to, sort of, introduce something that doesn’t have unintended consequences in the Australian market.
TB: Good. Thank you, Chris.
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