AFG calls for public RMBS

The aggregator put forward its recommendation in a submission to the House of Representatives standing committee on economics for its inquiry into promoting economic dynamism, competition and business formation.

AFG stated that while Australian governments have pursued measures to support smaller lenders to compete in the home lending market (such as the Australian Office of Financial Management (AOFM) supporting non-banks to raise funding through securitisation during the pandemic), these measures are no longer effective.

The aggregator suggested that non-bank financial institutions and smaller banks were therefore unable to compete with the big four major banks on the cost of funds.

“In the absence of such support, the field is essentially only open to one group of players – the major banks,” AFG stated.

“The big four once again are presented with an opportunity to claw back market share by sidelining their smaller competitors and the mortgage broking industry.”

By creating a public RMBS, this could be remedied, the group said.

Under AFG’s proposed RMBS scheme, there would be:

• More choice and competition in the mortgage market to create a more level playing field for the big and smaller banks
• Lower interest rates for home buyers including reductions in both variable and fixed mortgage rates
• Stabilised funding margins to lessen volatility in mortgage rates
• Lower systemic risk for Australian lenders through matched funding of government-supported mortgage bonds
• A larger and more diversified global investor pool, improving liquidity across the market
• Reduced liquidity cover costs for banks as government-supported structure mitigates deposits mismatch risk
• A new source of investment proving more opportunities for investors

AFG suggested this proposal supplements the private RMBS market with a publicly supported RMBS scheme against a backdrop of deteriorating competition.

The group acknowledged that the Australian financial market should continue to feature private sector-based securitisation such as RMBS, however, the “entrenched competitive advantages” of the major banks require smaller or non-banks to have a similar pricing support in order to compete.

“Given the need to address the cost-of-living squeeze facing households in 2023, and the high proportion of home buyers battling higher interest rates and mortgage repayments, a policy measure that generates competition in the home loan market deserves serious consideration,” AFG stated.

[RELATED: AFG eyes diversification among economic headwinds]