Rba Takes $1b Risk To Help Banks

Sydney Morning Herald

Tuesday April 22, 2008

Jacob Saulwick

THE Reserve Bank of Australia has exposed itself to more than $1 billion worth of household mortgages in the past few days as it seeks to spark life into moribund debt markets and help banks continue lending.

Amid reports of a similar intervention by the Bank of England, the Reserve Bank yesterday accepted $780 million worth of securitised Australian home loans as collateral for the regular loans it extends to local banks.

The deals were part of a larger-than-usual $3.5 billion injection by the Reserve in its daily money market operations.

With the banks scratching for funds since the onset of the credit crisis, most of that funding was for more than 300 days, longer than usual extension term offered by the Reserve.

The Reserve only began accepting residential mortgage-backed securities as collateral for loans last October as a measure to help ease a worsening liquidity drought.

Until last Friday most of those loans, or repurchase agreements, had a relatively short lifespan.

On Friday, however, the Reserve went into the market offering longer-term loans backed by high-quality mortgages.

It accepted $320 million worth of residential mortgage-backed securities as security on Friday, and followed that up with yesterday's $780 million intervention, bringing the total in the past two trading days to $1.1 billion.

Approximately 90 per cent of those loan agreements were for about a year, in a sign the Reserve had intensified efforts to shore up confidence in key credit markets and prevent banks from having to rein in lending.

From the information released by the Reserve, it is impossible to tell which banks had taken out the loans.

The market for mortgages packaged together as securities has all but closed since the onset of the credit crisis last August, denying both bank and non-bank lenders a major source of finance. The chief economist at ABN Amro, Kieran Davies, said the Reserve was effectively taking more risk on its balance sheet by accepting riskier assets as collateral.

"In years past, the central bank would normally have taken government bonds," he said.

The Reserve will only accept residential mortgage-backed securities backed by AAA-grade mortgage documents.

According to Standard & Poor's figures, at the end of last year about 0.3 per cent of people with fully documented prime mortgages in Australia were more than 90 days late with their repayments.

In the US, the delinquency rate on comparable mortgages is about 3 per cent.