The Treasury has indicated that it will adopt a much more flexible, "reverse-inquiry approach" to participating in the RMBS market, which more closely reflects the prescriptions that
I have tendered in the past as to how they should seek to buttress liquidity during periods of duress. According to the banking-bible,
The Sheet:
The Australian Office of Financial Management plans to take a more flexible approach with its second round of government funding to support RMBS issuance.
AOFM RMBS portfolio manager David Ziegler told the Australian Securitisation Conference yesterday that the improvement in securitisation market conditions meant that the AOFM would need to look at its approach.
Last month the Treasurer announced that the AOFM would receive up to another $8 billion to support competition in the mortgage market.
Treasurer Wayne Swan said he would direct...the AOFM and Treasury to consult with industry on the merits and commercial feasibility of delivering part of its support through a fee-based liquidity facility rather than direct investment.
Ziegler said the AOFM had not received its final directions from the Treasurer.
He said: “The AOFM needs to take a more flexible approach. That may involve allowing issuers to come to market according to their own timetables, rather than running a tender as we did in the first round.
“We may move to a traditional reverse inquiry process."
Prior to the government's recent announcement that it was doubling the size of its RMBS commitment to $16 billion, I observed:
We would have preferred to have seen the government announce that it was making an enduring commitment to support the liquidity of Australia’s RMBS market, which had until the advent of this crisis supplied funding for up to one quarter of all Australian home loans. The government need not have disclosed the dollar quantum of their commitment, or the timing of any interventions. In this way, they would have retained the flexibility to participate privately in the RMBS market alongside other investors to influence pricing during periods of extreme duress. This is exactly what the RBA does in the foreign exchange market when it judges that the price of the Australian dollar has materially departed from fair value. To quote the RBA:
“Financial markets can overshoot – ie. asset prices can move to levels that do not seem reasonable in the context of a range of economic and financial developments. There is an extensive literature…on speculative bubbles, herding, fads, and other behaviour which can drive market prices away from their equilibrium values, even in a market which is deep and liquid. When such overshooting occurs, intervention may help in limiting the move or returning the exchange rate towards its equilibrium level, thus obviating the need for costly adjustment.”
The same rationale could be employed by the government to justify irregular interventions to influence the liquidity of (and hence pricing in) the securitisation market. But it needs to define a coherent policy framework before doing so. And this should in turn be embedded within a broader recalibration of Australia’s financial and regulatory architecture.
For a more detailed history of my involvement with these ideas, refer to
this article.
