I was a little surprised to see the Australian Bankers Association (ABA) support a number of proposals I and others like Nicholas Gruen have made with respect to improving the liquidity of the RMBS market in its submission to the Senate Inquiry. These include extending the direct AOFM investments in RMBS, having the government support the insurance of RMBS, and permitting RMBS to be included as a 'liquid asset' under BASEL III:
"The Federal Government should support further reforms and efforts to re-establish a properly functioning market for securitised mortgages. Immediate and longer term efforts will be required:
• Immediate: Government should extend investment support via the Australian Office of Financial Management (AOFM) into the Australian Residential Mortgage Backed Securities (RMBS) market.
• Longer term: Government should establish a working group with banking industry experts to explore options, identify strategies and agree actions to be taken to rebuild the securitisation market in Australia.
Rebuilding the securitisation market in Australia is essential not only in terms of addressing the availability and cost of funds for banks and promoting competition within the Australian banking industry, but also in terms of providing an alternative asset class to bank paper necessary for meeting the new liquidity standards.
The ABA believes there are also a number of options for addressing some of the longer term challenges for the securitisation market. We consider further reforms could be implemented, including:
(1) Accepting third party AAA RMBS paper as an asset under the new liquidity rules.
(2) Introducing a fee-based facility for providing Government support to the Australian RMBS market based on certain regulatory requirements.
(3) Establishing a Government corporation or market-based SPV to provide mortgage lenders with mortgage default insurance as credit quality enhancement.
(4) Developing a new “bullet” RMBS security."
