Reserve Is Ready If Crisis Strikes

Sydney Morning Herald

Saturday June 28, 2008

Jacob Saulwick

THE Reserve Bank is bolstering its defences against a meltdown in financial markets, preparing a contingency plan if a financial institution finds itself in stress.

In a speech in Sydney yesterday, an assistant governor, Guy Debelle, said the Reserve Bank was working with the banking regulator and other market participants to "strengthen arrangements for dealing with extreme market disruptions".

The Reserve Bank's oversight of the money market had coped well during the financial turmoil triggered by the US subprime crisis, Dr Debelle said.

The Reserve Bank has been praised for its handling of the turmoil, particularly for its early move to ease liquidity pressures.

In October, the central bank announced it would accept securities backed by high-quality residential mortgages in exchange for cash in its daily market operations. While banks have not tapped this funding source to a large extent, it is seen as an important contingency.

The Reserve Bank placed strict criteria on the residential mortgage-backed securities it was willing to accept. It will not accept RMBS as collateral if the mortgages have been sold by the counter party to the deal. But if a bank or credit union faced serious difficulties, the Reserve Bank would be willing to "provide funds against RMBS collateral to which it is 'related' ".

The Reserve Bank has been encouraging banks and other big lenders such as credit unions to package residential mortgages on their balance sheet into securities. They would then be able to exchange them for cash with the Reserve, in the event they needed funding.

"To date, eight institutions have created these 'self-securitised' RMBS and a number more are in the process of doing so," Dr Debelle said.

The Commonwealth Bank's chief executive, Ralph Norris, this week said the liquidity crunch could stretch until mid-2010.

Dr Debelle said the cash rate remained reasonably steady during the uneven demand for money. The cash rate has only deviated from the target on nine days and by no more than two basis points.