![]() The mortgage securities in these vehicles were then in some instances brought back onto the sponsoring bank's balance sheet, obliging them to pay out the corresponding debt.īy late last year there were thus three additional sources of demand for bank lending - households which might have formerly have used smaller lenders which funded their lending by securitisation, bigger businesses denied access to the bond market, and (to a much more limited extent than in the US and the UK) the banks own assumption of assets formerly held in conduits. As was the case with banks in the US Europe and the UK, there was suddenly no market for the paper backed by mortgages - or at least not at yields which made these vehicles smart business. Though to a much lesser extent than in the US and the UK, some Australian banks had taken some home mortgage assets off their balance sheets, and placed them in vehicles financed with short term paper. The major banks picked up home mortgage business, while the regional banks held market share. The mortgage providers dependent on that market had no alternative but to batten down, or in the case of RAMS, to sell their physical assets and brand. ![]() When that market closed, as it did in November, it left a considerable hole in the funding of Australian household demand for mortgages. While the majors used the RMBS market opportunistically to secure term funding, the smaller players in the home mortgage market depended on securitisation as a relatively cheap source of funds in the absence of a retail deposit base. This was good business for banks, but it happened to coincide with a period in which their funding requirement had anyway increased.Īustralia's major banks were not as dependent on the Residential Mortgage Backed Securities (RMBS) market as many offshore institutions, but securitisation had become very much more important in recent years. The attenuation of the corporate bond market encouraged many business borrowers to look to banks as an alternative source of funding. ![]() Within weeks of the onset of the crisis in late July last year, Australian banks were faced with some of the same pressures on liability side of their balance sheets which bothered their offshore counterparts. Nor was the manifestation in Australia limited to a similarity of movements in yields and some financial asset prices. After a prolonged period in which the connexion between the performance of the Australian equity market and equity markets abroad had become quite tenuous, the Australian equity began to be more influenced by movements in the US and Europe. The market for Australian residential mortgage backed securities is largely offshore. Spreads on Australian AAA corporate paper blew out as high quality paper spreads blew out elsewhere, and the market in corporate bonds faltered in Australia as it did in other advanced economies. ![]() The spread did not increase as much as elsewhere, an early sign that Australia's experience would be relatively mild, but it was enough to signal that the Australian financial system would not be immune. The spread between three month bank bill swap rates and cash, for example, increased almost immediately, revealing that Australian banks had become as eager to increase their liquidity and as reluctant to part with it as banks in the US, Europe and the UK. The distance, the dissimilarities, however, did not prevent the manifestation in Australia of some aspects of what we have come to call the sub prime financial crisis soon after its eruption in the United States towards the end of July last year. ![]() Sydney is about as far from New York as it is possible to be on the surface of this planet, and while there are many similarities between the Australian economy and financial systems and those of the UK and the US, there are also important differences. The manifestation of the crisis in Australia ![]()
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