Swannie Mac

Hot from the office of the Treasuer: 

More Support for a Competitive Lending Market

Today I announce that I have directed the Australian Office of Financial Management (AOFM) to invest a further $4 billion in high-quality, AAA-rated Australian residential mortgage-backed securities (RMBS) to help smaller lenders continue to offer competitive loans to families and small businesses.

This brings the Government’s total investment in the RMBS market to $20 billion since late 2008, and continues our strong support for this vital funding market that helps smaller lenders compete with the big banks.

The global financial crisis led to a severe dislocation of international capital markets, dramatically reducing liquidity and funding access for smaller lenders. Without the Government’s support, many smaller lenders would have withdrawn from the market, reducing competitive pressure on the big banks.

The Government’s existing $16 billion RMBS investment has helped put downward pressure on borrowing costs, helping the RMBS market again become a cheaper source of funding for smaller lenders.

Our involvement has fostered a recovery of investor confidence in the RMBS market with the proportion of private investment in AOFM-supported deals rising to 72 per cent on average from 32 per cent in January 2010. In addition to the $29 billion worth of deals AOFM has supported, we’ve seen some $12 billion worth of issuance that has occurred without direct support from the AOFM.

The Direction is issued under section 62A of the Financial Management and Accountability Act 1997 and implements my announcement on 12 December 2010. It also allows for the remaining $3.463 billion of our second tranche to be invested, which remained uninvested at the time I signed the Direction.

The Direction sets out that the Government’s objective in making this investment to:

  • further boost competition in the mortgage market by supporting smaller lenders;
  • provide support for lending to small business, through participating lenders using some of the proceeds of the AOFM’s investment for lending to small business; and
  • encourage a transition towards a sustainable and innovative RMBS market – which allows AOFM to continue supporting smaller lender issuance of bullet RMBS, as an alternative to traditional RMBS, to help develop this market for smaller lenders to diversify their funding.

The Direction also ensures the Government’s investment supports smaller lenders, rather than the big banks or lenders that do not clearly operate independently of the big banks.

The Direction will be tabled in Parliament out of session shortly. The AOFM has provided an operational notice at www.aofm.gov.au.

CANBERRA
8 April 2011

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Torchwood1979

    Only $4 billion? “Chickenfeed!” as Aussie John puts it. Just how much downward pressure will this put on borrowing costs? Looks more like PR and an attempt to restore some confidence in our faltering market.

  2. Dear Mr Swan,

    How can we support the banks? Some simple, but tried and tested ideas worth of your consideration:

    a) keep the deposit guarantee forever,
    b) an extra grant for first home buyers,
    c) increase super for the ‘workers’,
    d) introduce covered bonds,
    e) reduce corporate tax.
    We all agree – the banks need more of our money, we have too much and they have too little.
    Oh, the poor darlings:), they are deserving of your helping hand.

    Kind regards,
    ‘Taxpayer’

  3. You vote for these measures every 4 years for either stooge A party who promises bribes and stooge B party who does the same, now suck it up because they will take you to the promised land…

  4. Sorry, forgot the most important bank policy proposal:

    f) increase bank CEO remuneration in line with ‘best international practice’ (such as USA)

    ‘Catholic Nuns ask Goldman Sachs bosses whether they’re really worth $69.5m’

    Quote:

    “The Sisters of Saint Joseph of Boston, the Sisters of Notre Dame de Namur, the Sisters of St. Francis of Philadelphia and the Benedictine Sisters of Mt. Angel want Goldman’s compensation committee to report back by the beginning of October.

    The bank’s pay practices have faced criticism from religious orders in the past, but this call comes as Goldman revealed last week that its five most senior executives were awarded $69.5m in pay last year despite a drop in the bank’s profits.

    Mr Blankfein, who famously said in an interview in 2009 that the bank was doing “God’s work”, received a cash bonus of $5.4m as part of a total pay package of $14.1m for last year.

    The Benedictine nuns, along with the US charity, The Nathan Cummings Foundation, also asked Goldman’s committee to explore “how sizeable layoffs and the level of pay of our lowest paid workers impact senior executive pay.”

    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8425222/Nuns-ask-Goldman-Sachs-bosses-whether-theyre-really-worth-69.5m.html

    http://www.skynews.com.au/businessnews/article.aspx?id=598848&vId=

  5. I wonder if this news will make a few of those overseas investors in Australian government bonds have another look at their portfolio?

  6. So it’s Millions’..to box them up,
    And Millions’ to say we can,
    afford them Diced …
    What a competition …where do I enter..

    cheers JR

  7. Is there any breakdown of these funds that show that are actually going to the smaller lenders? Or is this another form of bank welfare that’s being being exploited by the big 4?