Speech Summary Opportunities and Challenges for Market-based Financing

Photograph of Philip Lowe

Speech to the ASIC Annual Forum 2014
Sydney –

The speech discusses recent developments in the Australian non-financial corporate bond market. It highlights that bank-based financing remains the dominant form of corporate funds in Australia, contrary to what was expected.

The role that superannuation funds play in intermediating between borrowers and savers is then examined. The speech assesses the role of superannuation funds in providing market-based finance and looks at the reasons behind the sector's relatively limited holdings of corporate bonds. This is compared with the large volume of bonds purchased by superannuation funds which are issued overseas and by authorised deposit-taking institutions in Australia. The speech suggests that rather than financing the corporate sector directly, superannuation funds have helped finance the banks (which in turn has financed the corporate sector). This is described as a ‘lengthening of the chain of financial intermediation’ – from savers to superannuation funds to banks to borrowers. As a result of this, the development of a deep and liquid corporate bond market is described as a ‘work in progress’.

Consideration is then given to the significance of the corporate bond market for the wider economy. From a stability perspective, the speech explains that the market can act as a ‘spare tyre’ if the banking system faces difficulties, and thus allow the economy to continue to operate relatively normally. It goes on to highlight the importance of providing financial infrastructure for the corporate bond market to fulfil this ‘insurance role’ and act when most needed. The speech also explores how the market can ensure that a lack of competition in the banking sector does not lead to excessively high prices for financial intermediation.

View the speech