Different responses to a big opportunity

Home loan market share

Look at this graph of the great tectonic shifts brought about by the GFC. Securitisation collapsed as a form of funding, and those in the official family ran round doling out gold plated assistance like free government guarantees to our banks (and next to nothing for our securitisers). The opportunity was taken up by just two of the four banking oligarchs, with the other two deciding to let the moment pass. ANZ was busy leveraging its government guarantee to buy Asian banking assets and NAB, well I’m not sure what NAB was doing. Perhaps they and ANZ invested wisely, but you’d work a long time to pick up the market share that Westpac and CBA managed to do at the time.

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Fyodor
10 years ago

Securitisation collapsed as a form of funding, and those in the official family ran round doling out gold plated assistance like free government guarantees to our banks (and next to nothing for our securitisers).

The government guarantees weren’t free. The government has already collected over A$2.7bn in fees from the banks on the scheme, and that will rise to A$5bn by the time the scheme completes. There have been zero claims against the guarantee.

See here.

Also: the non-bank originator thing. Let it go, dude. It’s over.

ANZ was busy leveraging its government guarantee to buy Asian banking assets

Arguable. The only notable Asian acquisition around that time was that of a portfolio of RBS’ Asian assets, which were self-funded (i.e. deposits exceeded loans), and ANZ raised far more in equity than it spent on those. It’s hard to see how the government guarantee was “leveraged” to enable that transaction, unless it’s one of those “vibe” things.

Perhaps they and ANZ invested wisely, but you’d work a long time to pick up the market share that Westpac and CBA managed to do at the time.

The government of the day allowed them to acquire SGB and BWA, respectively, explaining the “tectonic” increases in market share. It’s in the notes to the chart.

rog
rog
10 years ago

NAB got seriously burned overseas and it took John Stewart to breathe life and bring parsimony to its heaving carcasse.

Fyodor
10 years ago

Fyodor, the deposit guarantees were free and the guarantees available for purchase were only available to banks, a pretty obvious problem if you’re a securitiser. And in addition to the purchases of other banks, the collapse of securitisation is also in the chart.

Only small deposits were guaranteed for free, and there was no evidence at the time or since that any of the large banks had any difficulty in retaining those deposits, thus undermining your implication that a subsidy was in operation.

As for “securitisers”, you’re neglecting to include the banks themselves amongst those ranks. They were amongst the more active securitisers and pulled out when it became unprofitable to do so. That you persist in arguing that an economically unsustainable sector should have been subsidised is further evidence of your bias, as discussed here before.

You imply that the “Big Four” gained market share at the expense of these “securitisers” after we account for the acquisitions made by CBA and WBC, however it’s obvious from the chart that ANZ’s and NAB’s market shares did not move materially, undermining that argument also.

PSC
PSC
10 years ago

Only small deposits were guaranteed for free, and there was no evidence at the time or since that any of the large banks had any difficulty in retaining those deposits, thus undermining your implication that a subsidy was in operation.

Except for the high interest they paid to retain and build their deposit funding.

murph the surf.
murph the surf.
9 years ago

Nick Gruen,
Isn’t one of the political points of the GFC that voters would support the government protecting what they saw as their deposits?
I am assuming that government was fully involved in the Reserve Bank’s actions.
Am I rating the relevence of their concerns too highly?

murph the surf.
murph the surf.
9 years ago

Thanks Nick.
The “they’ was referring to the general voting public.
Was the move designed to placate and reassure small depositors despite their small size collectively in the market?
Or is this an incorrect impression? Do the mass of small deposit holders together actually comprise a large share of the value of all credit holders?
.
Once Ireland announced their guarantee it seemed to me that central banks fell in line like set a dominoes.It was this pressure which to me as outsider looked like a political pressure point rather than a strictly bankerly solution – my guess at the expected course of action being being let some be liquidated and the creditors take the dreaded haircut.
I can appreaciate that a more nuanced response would have taken into account your concerns but the whole atmosphere at the time seemed rather feverish to me and actions were made that reflected an evolution in thinking about crises.
It may have been difficult to appear to be considering the interests of securitisers at the same time they were being blamed for all the evils of the GFC.

Fyodor
9 years ago

Except for the high interest they paid to retain and build their deposit funding.

Yes, banks compete on rate for deposit funding. SFW?

The banks liabilities had substantial exposure to at call deposits, but they had central banking infrastructure shoring up their liquidity. It’s not very surprising that securitisers didn’t have that resource were uncompetitive (even though they had less exacting term exposure to their creditors).

You have this arse-about. It is BECAUSE the banks were predominantly funded through deposits – which proved to be sticky – that they survived the drying up of liquidity in the wholesale funding market. Pure “securitisers” were solely reliant upon wholesale funding, which became materially more expensive, killing their business model.

The Australian government had and has no business subsidising dead business models.

What do you think would have happened to the banks without their liquidity being guaranteed by the central bank?

I think there would have been a dramatic deflationary episode as the banks shed assets to manage their constrained funding. This was appreciated by the RBA/government, so it followed the Bagehot Rule.

Who knows which model is superior (my hunch is securitisation because it’s way more transparent – at least in the Australian prime mortgage market – though I won’t expand on that here), but the idea that this is some free market revelation of relative costs of the two models of finance is ridiculous.

We know which model was superior: the one that had a robustly diversified funding base that was not built upon an expectation that the bubble in credit would continue indefinitely.

We know it’s superior, because the model of the securitisers was dead in the water well BEFORE government intervention in money markets in favour of deposit-taking institutions.

My point is that, in addition to all sorts of standard facilities of central banks to vouchsafe liquidity and to provide confidence to the creditors of banks that they’d get their money back, there was very little thought given to adding the question of competitive neutrality. A shadow banking system grew up around the banks which had all the weaknesses that the banks had before they received all that central banking and other (central government) support.

Sorry, but I have to call bullshit on this one. As explained above, the “shadow banking” system was fundamentally weaker than the banking system itself and arguably grew to material size only because of the credit bubble of the early 2000s. These securitisers were failing well before the GFC struck in earnest and it’s “ridiculous” to argue otherwise.

As I implied before “competitive neutrality” does not extend to propping up unsustainable business models with government subsidies.

When the Great Bank Run arrived, the banks were fine – sitting happily behind government guarantees. The shadow banking system collapsed – just as the banking system did in the Great Depression and just as it would have again in 2008 absent all the support it got.

First, what “Great Bank Run” are you talking about? Was there a run on the Big Four?

Second, you’re very certain of your contra-factual there. Why? The major Australian trading banks didn’t collapse in the Great Depression; why do you assume they would have done so in the absence of government support?

Fyodor
9 years ago

No need to subsidise any models. Just a bit of competitive neutrality in supporting liquidity.

That’s not “competitive neutrality”; it’s special pleading for a market segment that is structurally disadvantaged.

None of the securitisers I’m talking about – which are securitisers of prime Australian mortgages – were failing before the GFC, and none have failed since.

Is that so? OK, let’s review the big names in Aussie RMBS:

RAMS? No – bought by Westpac.

Aussie Home Loans? No, converted to broker from securitiser, backed into CBA.

Wizard? No – GE (its parent) ceased issuing RMBS and sold the guts of its portfolio to Aussie/CBA.

Challenger? No – sold its mortgage business to NAB

Macquarie? No – withdrew from Australian RMBS issuance [since reopened]

Bluestone? No – shut down RMBS issuance

So which securitisers ARE you talking about?

There’s a couple of outfits left hanging on, e.g. FirstMac, Resimac, Members Equity and Liberty Financial. But how many of them would have survived without the AOFM buying their RMBS? Or does that not count as “liquidity support”?

If you want to debate what I’m saying, rather than what you imagine me to be saying, I’m happy to do so.

Given I’m responding only to what you’ve written, I can’t imagine what you imagine I’ve been imagining.

Obviously the dodgy securitisation that got going in the US was dysfunctional on numerous levels and should have been extinguished.

Given a key element of the US housing clusterfuck was the role of FRE and FNM in distorting the market with explicit, and then implicit, government “liquidity support”, I suggest your position is more than a little inconsistent.

Fyodor
9 years ago

My use of the word ‘failed’ was a reference to solvency, not liquidity.

So what? It changes nothing of the facts, i.e. the securitisers’ business models proved uncompetitive.

None of the investors in any of the prime mortgage securities ever lost any money or looked like it.

So what? We were discussing the funding structure of the securitiser, not the investment performance of the RMBS themselves.

Treating Macquarie’s closure of its RMBS as a failure in the terms of this debate is kind of unproductive.

Why “unproductive”? They made the rational decision to close down a business that was no longer sustainable.

Neither of us disagree that, as a stand alone operation against the mature, government guaranteed and otherwise supported banking sector, RMBS is not competitive. I’m saying that’s because of non-neutralities in the way they are treated.

Based on what? I’ve already demonstrated that the banks’ funding structure was more diversified, predominantly deposit-based – thus more reliable – and less reliant upon wholesale markets, and that this enabled them to survive while securitisers’ business models failed. Importantly, this failure occurred well BEFORE the introduction of government guarantees, which totally undermines your argument that government intervention saved the banks preferentially over the securitisers.

There was a little liquidity support – via AOFM. Do you think it was adequate to deliver competitive neutrality between banking and securitisation?

No, of course not – the securitisers were fundamentally uncompetitive, and shouldn’t have been supported at all. That’s the point.