Transcript of Question & Answer Session Securitisation: Past, Present and Future

Jonathan, thank you for that. There are a few questions that have come through; these are jumping around a little bit. The first one here: what is the RBA’s view of implementing risk-free rates in Australia in the near future? You touched on that, but you were talking more about a fall-back. How about implementation?

The implementation of …

Of risk-free rates. I think the question would refer to an alternative to BBSW.

Right, okay. That’s obviously something that the Reserve Bank has been involved in, but we’re very happy to listen to the market and see what market interpretations are. I mean, obviously, a useful fall-back is OIS, overnight index swap rates. The cash rate is a market that we see a determined price, so that’s a reasonable benchmark. But, obviously there can be others that markets can determine.

Okay, thank you. Another question: you noted that the AOFM’s market intervention in 2020 was broader than post GFC. How might future AOFM support further evolve its approach, if at all, if it was ever needed?

Okay. Well, let’s start with let’s hope it’s never needed. I think we’re all much happier if the market is working well and functioning and there isn’t any support from government needed. The support was designed very much to keep private sector participation involved. So, a crucial difference I think we saw between the GFC and the pandemic period was, in the GFC, the support from the AOFM was investing in AAA-rated securities, and that was sort of crowding out private sector investment, whereas this time around the AOFM was able to invest more broadly across the capital stark and so that could bring private sector investors into the securities. And the AOFM was, I think also very tactical in how it was investing, and a primary aim of it was to ensure that there was market participation and to be able to gradually phase out as that was available. So, I think, this is obviously not my domain and this is something that the government and the AOFM would determine. But I think we can broadly take some lessons in the same way that we learnt from the GFC about the impacts of various market measures. We’ve learnt from the pandemic on the impacts of market measures, and I would imagine that the government and AOFM would continue to learn if they did face that situation again. But, as I said, fingers crossed we don’t need it.

Thank you, and I’d agree with that. There’s a couple of questions on collateral of one form or another, following your comments. So the first one: has consideration been given to allowing RMBS and covered bonds to be included as HQLA2 in a similar way to other jurisdictions such as Canada, UK and Europe?

At the moment, there isn’t any plan to change the definitions of HQLA. That’s broadly a decision for APRA in terms of what is classified as high-quality liquid assets for meeting various liquidity requirements. We’ve responded to market conditions in deciding that there’s ample HQLA to wind down the CLF, so we are continuing to respond to the market conditions. But at this stage, I don’t think there’s anything that APRA are looking at changes.

We have a queue. Somewhat connected: collateral freed up by the requirement for less self-securitisation RMBS could go into covered bonds. Should the limit on encumbrance from ‘covereds’ be adjusted?

I think you’ve got a speaker from APRA later today, so a lot of these questions are probably better focused to her. Look, I think, covered bonds are used more broadly, say, in Europe than they are in Australia. One of the very strong things we have in Australia is depositor preference, and part of the reason for having a limit on the issuance of covered bonds in Australia is to ensure that you’re not removing, – encumbering – many assets that are on the bank’s balance sheet so that there is still a large quantity of assets on the bank balance sheets to ensure that that depositor preference is well based. So we don’t have paid-for insurance on deposits in Australia, as you do have in some other jurisdictions, but there is that government guarantee, or effective guarantee, up to $250,000. We want to limit the chances that the government could ever be liable for—actually, that would fall back to the banking system, I should say. But, we want to make sure that, even if there was a problem with the bank, there’s ample assets on the bank’s balance sheet to cover depositor preference. So that’s essentially the reason why. But, if you’ve got further questions about that, take it up with APRA this afternoon.

A lot of these questions actually probably could be directed at APRA, so maybe next time we should have both of you together.

Just warming up for APRA this afternoon.

So we had a couple of questions on ESG, the first, which you’ve kindly talked about. Do the regulators have any intention to support ESG issuance, such as concessional liquidity or capital requirements?

So this is something that different countries and jurisdictions are taking a different approach to. In Australia, we’ve tried to be agnostic about different types of securities and treat everything on a risk basis and a liquidity basis so that the types of ‘haircuts’ that we impose at the RBA are very much based on risk; and, equally, when it comes to APRA’s determination, they’re very much based on liquidity and risk. So we think that’s the most appropriate way to deal with this. It is, of course, relevant that ESG can start feeding into credit risk. So we can easily imagine that if we think there is going to be a transition in the Australian economy, as there will be globally, and there are physical risks coming from climate change, then those will feed through directly into credit risk. So we think that, ultimately, those ESG factors will actually feed through and it will be important for the market and ratings agencies to be cognisant and aware of what the impact of ESG factors are having on the credit quality and liquidity of securities. So we think there that things like disclosure are going to be really important for ensuring that those factors do come through into pricing of securities as well as their credit risk and acceptance in the market.

Thank you for that. I’ve actually got a lot of questions now, but we’ve probably got time just for one more, if we could trouble you with that.

Sure.

With wider margins between banks’ senior wholesale debt and RMBS, is the RBA concerned about a future reduction in competition in the lending sector, especially in less well-served sectors?

So we’ve actually seen very strong competition in the housing market, which is where most of securitisation is supporting in Australia. Recently, we’ve actually seen a lot of issuance of ABS outside of RMBS as well. The share of lending that’s done by non-bank lenders, who are the main beneficiaries of RMBS issuance, has actually increased in recent time, with the growth of housing credit from non-bank lenders well exceeding that of bank lenders. So we think there’s actually been pretty good competition coming from those non-bank lenders who are the recipients of RMBS funding. So it actually looks pretty good there.

As I say, there are plenty more questions for both you and APRA, but thank you very much for turning up today and speaking to us. Thank you, Jonathan.

Thanks very much.