Australia: Government Guarantee For RMBS And Recognition Of Importance Of Securitisation

On 17 September 2009, the Senate Economics References Committee (the Committee) released its report "Government measures to address concerns in the financial sector - The Financial Claims Scheme and The Guarantee Scheme for Large Deposits and Wholesale Funding" (the Report). In a welcome move from the Committee, both sides of politics supported the introduction of a guarantee scheme for residential mortgage-backed securities (RMBS) (the RMBS Recommendation). In addition, there was unanimous support for the Government to review the fees charged for the wholesale funding guarantee and the guarantee for large deposits (the Fee Recommendation).

The Report is important as it shows there is bi-partisan support for further government intervention to reinvigorate the RMBS market and recognises the significance of securitisation as a funding tool for the non-major banks and the non-bank originators, the survival and prosperity of which is crucial to a competitive banking sector.

Commentary

The RMBS Recommendation focused on the impairment of the securitisation market, and the impact this has had on the non-majors and non-banks. The Report confirms that "the securitisation model of financing should be supported through its current difficulties" and recommends the introduction of a Government guarantee for RMBS. Such a guarantee could replace the wholesale funding guarantee and, if priced appropriately, could restore a level playing field for mortgage lenders.

The Fee Recommendation focused on concerns over the anti-competitive consequences of the fee structure for ADIs availing themselves of the wholesale funding guarantee and the guarantee for large deposits and, notwithstanding the presence of these guarantees (and the principle that the market should price all guaranteed debt the same), lower rated ADIs were paying higher rates to attract deposits or to obtain wholesale funding. The combination of these two factors being a competitive disadvantage for the lower rated ADIs.

Other matters discussed in the Report include the interplay between competition and solvency concerns, the transition to a permanent deposit guarantee scheme, and the interaction between the provision of a guarantee scheme and moral hazard (the Minority Report recommends APRA monitor ADIs to minimise issues of moral risk).

The Report comprises:

(a) a majority report by the Liberal and National Party senators (the

Majority Report);

(b) a dissenting report by the Labour Party senators (the Dissenting Report); and

(c) a minority report by the Independent senator (the Minority Report).

All three reports support the Fee Recommendation and, with the exception of the Minority Report which is silent on the matter, the RMBS Recommendation. The Dissenting Report says that the RMBS Recommendation "is important to maintain competition and a range of financial products in the marketplace ... the Government should reassess the benefits of temporarily guaranteeing Residential Mortgage backed Securities".

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