Australia doesn’t have nearly as much government debt as Broken Europe. So the local solution is the CLF (Committed Liquidity Facility).
This allows Aussie banks to deposit eligible securities with the RBA and in return the RBA will give the banks liquidity – cash.
The question is, what securities can the banks deposit with the RBA? You guessed it… good old residential mortgage backed securities (RMBS)… the safest security in the land… apparently.
With CLF, the bank agrees to buy the RMBS back from the bank at a fixed price at a later date. That’s why it’s called a repurchase agreement (Repo).
Supposedly this means there’s no risk of a moral hazard problem… where the banks make any loan knowing the RBA will buy it… or is there?
Of course there is. There’s always moral hazard when anyone guarantees to accept something in the future. Especially when there are no questions asked.
You see, the CLF is a banking bailout by another name. No-one will admit the entire global banking system is broke. So Aussie central bankers worked double-time to make sure Aussie banks can stay in the game.
They (like their U.S. and European counterparts) need to keep re-writing the banking rules in order to not go bust.
But the Aussie banking funny-business is just a sideshow. The real stuff is overseas.
From the Archives…
The Onward March of the State
2011-11-11 – Kris Sayce
Lose a Shirt, But Gain a Wardrobe
2011-11-10 – Kris Sayce
Neither a Borrower Nor a Seller Be…
2011-11-09 – Kris Sayce
Roman or Zimbabwean
2011-11-08 – Kris Sayce
Lighting a Match to Inflation
2011-11-07 – Kris Sayce
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
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