Treasurer boosts investment in residential mortgage-backed securities
The Treasurer, Wayne Swan, has directed the Australian Office of Financial Management (AOFM) to invest a further $4 billion in high-quality, AAA-rated Australian residential mortgage-backed securities (RMBS) to help smaller lenders continue to offer competitive loans to families and small businesses.
The investment is in addition to the $16 billion invested in the RMBS market in late 2008.
Announcing the decision, Mr Swan said the global financial crisis had led to a severe dislocation of international capital markets, dramatically reducing liquidity and funding access for smaller lenders. He said the government’s initial $16 billion RMBS investment had helped put downward pressure on borrowing costs, helping the RMBS market again become a cheaper source of funding for smaller lenders.
Mr Swan said that the proportion of private investment in AOFM-supported deals had risen to 72 per cent on average from 32 per cent in January 2010.
“In addition to the $29 billion worth of deals AOFM has supported, we've seen some $12 billion worth of issuance that has occurred without direct support from the AOFM.”
The Treasurer’s Direction is issued under section 62A of the Financial Management and Accountability Act 1997 and implements the announcement he made on 12 December 2010. It also allows for the remaining $3.463 billion of the second tranche to be invested, which remained uninvested at the time the Direction was signed.
The Direction sets out that the Government's objective in making this investment to:
- further boost competition in the mortgage market by supporting smaller lenders;
- provide support for lending to small business, through participating lenders using some of the proceeds of the AOFM's investment for lending to small business; and
- encourage a transition towards a sustainable and innovative RMBS market – which allows AOFM to continue supporting smaller lender issuance of bullet RMBS, as an alternative to traditional RMBS, to help develop this market for smaller lenders to diversify their funding.
The Direction will be tabled in Parliament out of session shortly. The AOFM has provided an operational notice at www.aofm.gov.au.