RBA Signals Reduction of RMBS as Australia Collateral

Nov. 18 (Bloomberg) -- Australia’s central bank expects to reduce the amount of residential mortgage-backed securities it accepts as collateral from the nation’s lenders for repurchase agreements, Assistant Governor Guy Debelle said.

“With the improvement in funding conditions, we generally no longer expect or wish to see internal securitizations offered as collateral in our market operations on a regular basis,” Debelle told a securitization conference in Sydney today. He didn’t address monetary policy in his speech.

Debelle’s remarks add to signals from central banks around the world that they plan to cut or ease crisis measures. The U.S. Federal Reserve yesterday said it will reduce the maximum maturity on discount-window loans to 28 days from 90 days. Reserve Bank of Australia Governor Glenn Stevens has also said government guarantees for local banks may no longer be needed.

Australia’s central bank widened the range of securities it was willing to hold under repurchase agreements in October 2007, shortly after the onset of the global credit squeeze, to include both so-called RMBS and asset-backed commercial paper.

After the financial crisis peaked, the central bank ended last year holding around A$45 billion ($42 billion) of such assets.

“The bank intends to maintain the broader range of securities that it accepts in its market operations,” Debelle told the Australian Securitization Conference. “That is, internal RMBS will remain eligible collateral.”

‘Important Part’

Debelle, who heads the central bank’s financial markets division, said securitization will “remain an important part of the financial landscape,” as it represents a way of dispersing risk around the financial system.

“While I expect securitization to make a solid return, I do not expect it to be as large a part of the market as it was in 2007 anytime soon,” he said.

Australia’s government said last month it may double its investments in RMBS to A$16 billion to promote competition in the nation’s home-loan market and put “downward pressure” on borrowing costs.

Prime Minister Kevin Rudd’s government has not yet announced how the additional funding will be spent, Fitch Ratings said in a statement today. It may incorporate a widening of eligibility criteria to facilitate more lending to small businesses, and a facility to enhance Australian RMBS liquidity, according to the ratings company.

Credit Quality

The slump in new issuance in such securities amid the global financial crisis didn’t reflect concerns about the credit quality of local RMBS, Debelle said. “Unlike in the U.S., the credit quality of Australian RMBS has remained at the highest level throughout the financial crisis.”

Non-performing housing loans account for less than 1 percent of all RMBS issued in Australia, according to Reserve Bank figures. In the U.S., the rate is above 5 percent.

That performance reflects “both the quality and the composition of the types of loans securitized, which has been underpinned by the strength of the Australian economy, particularly the relatively low unemployment rate, robust household income growth, as well as low interest rates” Debelle said.

Signs that the nation’s economy is strengthening prompted central bank Governor Stevens to raise the benchmark lending rate by a quarter percentage point this month and in October to 3.5 percent, making him the only policy maker in the world to raise borrowing costs twice this year.

December Increase

Stevens will raise the rate on Dec. 1 for a record third month to 3.75, according 18 of 20 economists surveyed by Bloomberg on Nov. 13.

Gross domestic product grew 1 percent in the first half of the year after Stevens slashed the overnight cash rate target by a record 4.25 percentage points between September 2008 and April. The government also distributed more than A$20 billion in cash to households.

“The underlying sound condition of household balance sheets in Australia has helped limit the incidence of household financial difficulties during the economic downturn,” Debelle said.

Australian issuers of RMBS should use that strength to “differentiate” their product from U.S. assets, particularly among pension trustees “whose views may be affected by continual media exposure to the U.S. experience that securitized assets are excessively risky,” the assistant governor added.

“The message that Australian RMBS have been, and continue to be, a strongly performing asset needs to be continually reinforced,” Debelle said.