Christopher Joye has responded to concerns raised by Kevin Davis in the Australian Financial Review. [Over the fold]
RBA liquidity falls short for home loans
Australian Financial Review
16 April 2008
Academic Kevin Davis’s “Regulation by reaction is usually wrong” (April 12-13) provides a grossly flawed critique of my proposal, co-authored with Joshua Gans (Opinion, March 27), to create a government organistion, “AussieMac”, that could present one solution to the current, and any future, credit crisis.
While our AussieMac proposal has been widely well received, and recently embraced by the Australian Securitisation Forum, most criticisms have been based on errors of fact. In Professors Davis’s case, he claims AussieMac “appears largely redundant” because of the RBA’s willingness to accept mortgages as collateral “achieves a similar effect”. In particular, he asserts that “the private sector can offload mortgage-backed securities for more liquid government securities.”
While the RBA is almost certainly our finest public institution, its repurchase (or ‘repo’) facilities do not achieve what Davis claims. The private sector cannot ‘offload’ their home loans on the RBA. The RBA categorically does not buy mortgage-backed securities and, based on my understanding, has no desire to do so. The RBA simply provides a temporary lending facility for usually no longer than 6 months. The RBA will only lend 90 cents in the dollar against these home loans giving rise to a significant funding gap. Non-bank lenders cannot, in practice, avail themselves of this facility. This is because institutions cannot use their own securities as collateral. That is, the RBA will not lend against the non-bank lenders’ own home loans, as Davis suggests. Since these are the only assets non-bank lenders normally have, the RBA facility is of no use.
The final point is that the RBA’s liquidity facilities have done nothing to prevent the closure (since November 2007) of the $50 billion per annum primary AAA securitisation markets. They have done nothing to prevent the ‘new’ home loan market share of the Big Five major banks rising dramatically to almost 90%. They have done nothing to prevent the effective withdrawal from the home loan market of key wholesale lenders like Macquarie Bank, RAMS, and ANZ’s Origin. They have done nothing to prevent dramatic credit rationing by other smaller lenders such as Adelaide Bank, Wizard, and Challenger. And, finally, they have not in any way prevented the severe credit rationing taking place in the small business lending and corporate debt markets, as the big banks substitute away from this riskier 100% risk-weighted sector to the much more profitable, 35% risk-weighted, home loan market.