Robust and evolving
Australian Securitisation 2019 took place in Sydney on 18 and 19 November with market-leading commentary on the evolution of the securitisation market, including collateral, lending regulation and benchmark reforms. The Australian securitisation market is poised to enter the next decade in robust shape, reflected by a record registration for and attendance at the Australian Securitisation Forum’s annual conference.
"ASIC guidance is just and only that: guidance. It does not have the force of law. The fact that we are updating our guidelines does not change the law, which has been in place since 2010. However, what has been made abundantly clear to us in the course of our consultations is that the industry would welcome more assistance in interpreting how to meet responsible-lending obligations."
"Since the responsible-lending laws came into effect, we are finding a lot of pre-2014 loans are looking to refinance and are struggling to be approved despite strong performance history. This is because there has been a major change to the regulatory environment and requirements regarding living expenses."
"The industry has not done a good job in the past 12-18 months of bringing customers along for the journey in how it is now interpreting responsible-lending laws. Customers did not understand why the industry was asking more detailed questions about their spending habits, though that is now starting to turn around."
"The new TLAC requirement means we expect to issue about A$3-5 billion more tier-two annually, depending on market conditions. To put this into perspective, it is around 10-15 per cent of our annual wholesale funding requirement. We are likely to reduce our senior-unsecured issuance but outside of this we expect to be largely unchanged going forward."
"Since 2018, we have seen a raft of new entrants into the public and private securitisation market. Partly this is being driven by the growth of the fintech sector, that looks to disrupt traditional funding paths or provide faster and more efficient credit to consumers, and challenge traditional lenders with their legacy IT and underwriting systems."
"Trust structures in Australia have been working well for decades and have done a very good job of separating assets and cash flows for the benefit of investors. New issuers want to come to market quickly, and as they are brought into scope for ASIC regulation that is where we step in – so they can run their businesses rather than managing trusts."
"The transmission mechanism for monetary policy has been impaired and only some of the 25-basis-point cash-rate cut in October was passed on to end borrowers. We are at a point now where the costs and benefits of cutting the cash rate further are perhaps not as much tilted toward benefits as they have been."
"There are long-term imbalances and themes playing out revolving principally around secular stagnation. There is too much saving and not enough investment. A lot of the issues driving this – high debt, shrinking working-age population and inequality – are here to stay, and how policymakers address these will be important for generating better growth outcomes."
"Fiscal stimulus would be ideal, but I think this global slowdown is consistent with what we saw around 2012 and 2015-16 – and in both of those cases monetary easing was sufficient to bring back economic growth. We are seeing early signs that indicators are bottoming out around the world. So I am reasonably optimistic that we will return to higher growth in 2020."
"Some issues make us a bit more worried about how the economic slowdown is panning out. One is the gap between different parts of the economy. Investment, manufacturing and trade are weak while consumption and services have been very resilient. At some point the gaps will close, but the question is how and at what point they will meet."
"From a ratings perspective, the challenges for new asset classes and new issuers in the ABS space are lack of track record and data. Consumer-loan origination is much more dependent on what exactly the originator is doing, how it underwrites and how it attracts customers. These factors will ultimately drive asset performance."
"Issuers have to provide loan-level data, static pool data and vintage data to the banks at the start of the issuance process. This is an inefficient process from the get-go because every issuer has different formats but banks have to standardise and analyse data before they can bring a deal to market. There is a lot of opportunity to streamline this process."
"The derivatives market has made more progress than others on IBOR transition – especially compared with the debt market, which tends to be more bespoke and require more renegotiation. Only a couple of the firms we wrote to were engaged with the issue of conduct and litigation risk as a result of transition."
"For a data warehouse provider, the value of getting data into cloud technology before and after settlement will pay dividends in future by making standardised data available to be analysed and visualised by all parties. This will improve market efficiency and support the issuer, investor and intermediary experience."
"The most significant impact of the PEXA platform for participants in the property industry is that, for the first time ever, real-time, accurate information on property transactions has been unlocked. What was once only documented on paper and locked in warehouses is now digitally accessible, and suddenly a range of solutions over the deal life cycle is possible."
"Australian dollar pockets of demand are shrinking in Japan but there are Japanese yen pockets that Australian issuers could access. There is demand, but the challenge is to get investors to engage with nonbanks. They are getting there for prime assets but are further away for nonconforming assets."
"The Japanese ABS-CLO market now has significant potential to grow. It has been based around a limited number of large investors since the financial crisis but it is becoming more diverse. We are already beginning to see increasing demand for international securitisation from Japan, across a broader range of investors."
"The Japanese market is still very conservative, focusing primarily on prime triple-A RMBS rather than nonconforming or other asset classes. These investors are also very selective about issuers. But some are beginning to move into other asset classes and to look at more names across regional banks and nonbanks. They still tend to need a lot of incremental work to come into deals, though."
"The low-rate environment is a growth opportunity for the nonbank sector. We are able to lower lending rates, maintain NIM and be competitive. With this comes an increased need for funding, but Australia is well placed for this given the yield compared with offshore markets and the performance of our assets."
"It is challenging to understand the differentiation points between terms like prime and nonconforming mortgages in different markets. To get investors across the globe comfortable there needs to be more standardisation of data to provide better definitions of products, so we can calculate risk profile."
"AONIA-based RMBS offers us a product that provides potential capital relief with match funding and reduces basis risk. Underlying mortgages are much more aligned with the cash rate – as we have experienced times, for instance during the financial crisis, in which we ended up as a net payer during extremely volatile periods for BBSW."
"In a low-yielding environment, we need to ask whether monetary policy is going to be effective as well as what unconventional monetary policy tools are available and whether they will be effective. There is a broader range of questions to consider before we think about how credit markets might be affected."
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