Is Australia securitisation’s ‘lab experiment’?

Is what’s going on in the Australian financial services sector a microcosm for the rest of us?

That’s a question that seems to be on the agenda for the Australian Competition and Consumer Commission (ACCC) and its chairman Graeme Samuel.  In the October 3rd edition of the Wall Street Journal, Mr. Samuel offers some views on the impact of the global financial crisis on the Australian mortgage markets.

For those that have followed the advent and growth of the securitisation industry in Australia, they know that this market was able to utilize securitisation to transform a relatively small debt capital market into a global heavyweight between 1995 and 2005.  In a market dominated by a small number of local banks, commercially favorable regulations provided for the rapid but measured growth of both local non-bank financing companies and the participation of offshore banks and insurance companies in the local consumer markets which had the very desirable effect of creating competition and choices for borrowers.

With the collapse of the securitization markets, came the collapse of the primary funding mechanism for non-bank financing companies.  With the new Basel regulations comes the very real prospect that capital adequacy rules will now make doing business in Australia largely prohibitive for foreign lenders.  The lack of competition is already fully evident as, in July 2010, 75% of new mortgages were written by the 4 large local banks. 

While these trends in Australia may sound extreme, they should send an alarm in the US and other domestic markets that have relied on securitisation to provide affordable access to consumer finance products.  This is the “shadow banking system” that we have all heard so many bad things about over the last three years.

Securitisation provided a consistent set of largely “global rules and expectations” among institutional investors which allowed financial investors to freely buy and trade  US, UK or Australian mortgage-backed securities with the same level of ease and confidence as if they were trading US Treasuries.  All the rules and fixes and posturing has instead created an environment where issuers and investors alike have little faith in their ability to understand how to structure, buy and trade these securities.

The results of all these “improvements” is just now beginning to be understood and felt.  Clearly, the Australian consumer will be hurt by a lack of competition for financial products (e.g. mortgages) if the securitisation markets do not recover.

While no two markets are the same, it is not hard to imagine a similar impact in the US markets, as firms which have historically utilized securitisation as a primary vehicle for funding their business are forced to either reduce or, worse, abandon those strategies.

About markferraris
Managing Principal Orchard Street Partners LLC

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