Residential Mortgage Backed Securities (RMBS)

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.

Cheers.
Kris.

 


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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