Securitisation to fund real economy, says Medcraft

IOSCO chairman Greg Medcraft has called on Australian banks and RMBS issuers to recognise the “integral role” that securitisation can play in financing the real economy.

Speaking at the Australian Securitisation 2014 annual conference in Sydney yesterday, Mr Medcraft said securitisation has funded the economy in the past, very successfully in Australia, and has the potential to do so again.

However, he added a caveat that this would only be possible if Australian RMBS, CMBS and ABS issuers can actually build sustainable securitisation markets.

“Building sustainable securitisation markets is actually something that has to be a joint project between the industry, issuers, investors, intermediaries, regulators and policymakers,” Mr Medcraft said.

“Our role as regulators and for policymakers is obviously to try and develop the right regulatory settings that help facilitate rather than hinder development of the market,” he said.

“Clearly we cannot and should not do that on our own. We need to do that to make sure that we actually work with the industry to make sure they are the right settings so that we don’t have unintended consequences.”

In addition, Mr Medcraft stressed the significance of understanding the “real money investors”, as Australian securitisation markets have typically focussed on issuers.

“I have seen this over 25 years in the securitisation market; often the industry has been too issue driven and not investor driven,” he said.

“I think it is really important to understand what real money investors need and want if you are going to build sustainable securitisation markets.

“I think that is really important if securitisation is going to fund the real economy and in turn economic growth.”

Also speaking at yesterday’s event was the Reserve Bank’s head of domestic markets Chris Aylmer, who observed that, in comparison with its overseas counterparts, the Australian securitisation market – which remains predominantly an RMBS market – has experienced a strong recovery over the past couple of years, albeit not to pre-GFC levels.

“Issuance started to pick up in late 2012, reached a post-crisis high in 2013, and has remained high since then,” Mr Aylmer said.

“This mainly reflects the strong performance of Australian residential mortgages and the high quality of the collateral pools which are primarily fully documented prime mortgages,” he said.

While the major banks have been the primary issuers of RMBS this year, Mr Aylmer noted that mortgage originators have also been active, predominantly in prime mortgage bonds.

“Mortgage originators have issued only $1.6 billion of non-conforming RMBS in five transactions so far this year,” he said, noting that the number of mortgage originators active in the market in the past two years has increased relative to the period from 2009 to 2012.

“They are an important presence in the market.

“In the period preceding the global financial crisis, mortgage originators took advantage of innovations in the packaging and pricing of risk.

“In doing so, they were able to undercut bank mortgage rates. The banks responded and spreads on mortgages declined markedly.

“While a number of large mortgage originators have exited the market, the presence of mortgage originators promotes competition in the mortgage market,” Mr Aylmer said.

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