Reserve Bank of Australia Plans Loans for Distressed Lenders

Who is knocking on the door of the Reserve Bank of Australia, looking for a handout?

The Bank issued a press release this morning, telling anyone who would listen that, "it has decided to further widen the range of securities eligible for its repo operations."

As of October 8, the list of eligible securities will include, "Australian dollar residential mortgage-backed securities (RMBS) backed by prime, domestic, full-doc residential mortgages and rated AAA or equivalent," and "Australian dollar asset-backed commercial paper (ABCP) backed by prime, domestic, full-doc residential mortgages (either directly or in securitised form) and rated P-1 or equivalent."

Are you still with us? Good. What does it mean?

A repo agreement does not mean the Reserve bank of Australia is buying securitised mortgages from distressed lenders, at least if our understanding is correct. It's more like the Reserve Bank is acting like a pawn shop with an exclusive clientele.

If you're a bank that's been in the habit of selling packages of securitised and collateralised loans, you've been having trouble finding buyers. Plus, you find yourself needing cash. That's when you head down to the Reserve Bank.

When none of your banker friends will lend to you or accept your securitised loans as collateral, the Reserve Bank will! - as of October 8th. You give the bank your dishevelled millions or billions in questionable assets, it gives you cash. You put that cash on your balance sheet to convince your banker friends you are safe to lend to. Reassured, they lend to you. With trust in the system re-established, you pay the Reserve Bank back later and take back the collateral no one else would touch.

As far as we can tell, then, you're seeing the provision of stop-gap funding for domestic lenders who can't re-sell securitised assets for which there is currently no market. These lenders may have been forced to borrow from the RBA because nobody else is lending. Or the RBA may be pre-emptively encouraging lending by indicating its willingness to step in if things get really messy (hence the October 8 date).

Dan Denning
The Daily Reckoning Australia

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