Today I announce that I have 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.
This brings the Government's total investment in the RMBS market to $20 billion since late 2008, and continues our strong support for this vital funding market that helps smaller lenders compete with the big banks.
The global financial crisis led to a severe dislocation of international capital markets, dramatically reducing liquidity and funding access for smaller lenders. Without the Government's support, many smaller lenders would have withdrawn from the market, reducing competitive pressure on the big banks.
The Government's existing $16 billion RMBS investment has helped put downward pressure on borrowing costs, helping the RMBS market again become a cheaper source of funding for smaller lenders.
Our involvement has fostered a recovery of investor confidence in the RMBS market with the proportion of private investment in AOFM-supported deals rising 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 Direction is issued under section 62A of the Financial Management and Accountability Act 1997 and implements my announcement on 12 December 2010. It also allows for the remaining $3.463 billion of our second tranche to be invested, which remained uninvested at the time I signed the Direction.
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 also ensures the Government's investment supports smaller lenders, rather than the big banks or lenders that do not clearly operate independently of the big banks.
The Direction will be tabled in Parliament out of session shortly. The AOFM has provided an operational notice at www.aofm.gov.au.