About six years ago, the Rudd government stepped in to guarantee wholesale bank debt and all deposits. It was contentious, but the government knew one bank was in trouble and decided it was best to back them all.
That near-death experience, together with an innovative liquidity solution Westpac’s treasurer, Kurt Zuber, produced in 2008/09, fundamentally changed the face and shape of the RBA’s role as lender of last resort in Australia’s financial system.
Zuber wanted to turn a big part of Westpac’s mortgage book into securities that could be handed to the RBA as collateral for a loan in times of crisis.
It directly addressed a key problem the RBA faced if a large bank got into trouble. How exactly could it follow Walter Bagehot’s edict to lend liberally to banks that were illiquid, but solvent, if it could not take the required collateral for loans?
The facility Zuber proposed, known as an internal securitization answered that question. Westpac, and soon the other majors and now most reasonably-sized ADIs would take loans off their balance sheet, put then into a trust, and have it issue securities backed by the cashflow and collateral of the mortgage loans. These securities would then be held by Westpac or other ADI, on their balance sheet, to be given to the RBA if required for a cash loan.
It was an incredible, straightforward answer to one of banking’s biggest questions and spawned Australia’s massive bank bailout fund, the RBA’s Committed Liquidity Facility (CLF)
But, because so many institutions now have access to the CLF – Westpac has $66 billion – the RBA could be on the hook for hundreds of billions of dollars if Australian banking ran into another round of GFC-style trouble.
So the RBA wants to know more about the performance of the underlying loans used as securities.
RBA assistant governor Guy Debelle pushed financial institutions with access to the CLF to produce loan level data. His plan was to make it public to bring real risk transparency to the mortgage market.
In March this year Debelle said the provision of this data is important for the industry:
The required information, which must also be made available to permitted users, will promote greater transparency in the market, supporting investor confidence in these assets. These requirements will also provide the Bank with standardised and detailed data on ABS, which are a major part of the collateral eligible to be used under the CLF.
But, something went awry on the way. Banks now only have to provide full details on the securities they have sold to the market.
That’s the new edict that came from the RBA last month, restricting access to a summary. Based on the RBA’s own comments that’s a backward step for the transparency in the Australian financial system.
Business Insider asked Guy Debelle if the RBA had caved to resistance from the majors and why the rule change had come just as the new requirements were about to start this month.
Debelle said the change had come about at such a late hour because as RBA moved toward implementation they recognized that the vast volumes of mortgages that some banks had placed in their internal securitizations didn’t only give transparency around the risk characteristics, but also the performance of those loans.
“That created a large continuous disclosure issue” for listed banks, Debelle said.
That’s because institutions could have inside information, via access to monthly mortgage loan performance statistics, before the market as a whole.
That would contravene section 674 of the Corporations Act and ASX listing rules because the information released under the RBA’s transparency initiative could be material enough, given the size of the internal securitisations at some banks, to move share prices.
In a world of Big Data you might wonder why the details couldn’t be released to everyone at the same time to keep the market informed. But that would be akin to monthly earnings reports, which no-one in the world does. And it could materially distract managers from the main goal of long term profitable and sound stewardship of their institutions.
So, Debelle said that a lower level of detail would be provided to the market for internal securitisations. But, he added, the full set would be released on securitised structures that were sold to investors.
That still leaves a big pool of securities for investors to evaluate. Crucially Debelle said the RBA would have the full data set and that meant its financial stability team would be able to perform the analysis the RBA needs to evaluate the securities and the performance of the institutions. No doubt they will use changes in the data as an early warning sign in there and APRA’s oversight of Australian finance.
In the end the objections of the big banks prevailed. But not because of the privacy concerns they raised.
The RBA’s plans were scuppered by Corporations Law.
It’s amazing no one recognized that earlier.