The Reserve Bank (RBA) has warned that banks may soon be facing margin calls as it prepares to make changes to the treatment of self-securitisations as collateral.
Self-securitisations, also known as internal securitisations, are structured pools of assets created by banks specifically to be used as collateral to access liquidity from the RBA.
They are the primary type of collateral that banks hold for the term funding facility (TFF), through which the RBA provided $188 billion in low-cost, three-year funding to authorise deposit-taking institutions as part of its response to the fallout from the pandemic.
In a speech to the Australian Securitisation Conference on Wednesday, RBA head of domestic markets Jonathan Kearns said that the central bank’s upcoming plan to unfreeze the modelled prices of notes issued from self-securitisations could trigger margin calls for banks.
He explained that, since self-securitisations are not traded in the market, the RBA values these securities by calculating prices using an internal model that captures the behaviour of spreads in the secondary market for asset-backed securities as a key input.
The RBA decided to freeze its modelled prices for three years in March 2020 “to mitigate the impact of price volatility on collateral values and margining frequency,” Mr Kearns said.
“This policy was beneficial during the period of high volatility and uncertainty. However, with improved economic and financial market conditions as we approach the end of this horizon, the [Reserve] Bank is planning to unfreeze prices in early 2023,” he said.
“Based on current market conditions, this is expected to generate margin calls for a number of TFF borrowers.”
Mr Kearns noted that the RBA will issue a market announcement and added that the central bank will be in contact with the affected institutions.
Financial sector ‘more resilient’ post-GFC
As part of his speech, Mr Kearns stated that the securitisation market fared better than expected during the pandemic.
“Overall, securitisation markets continued to provide competitively priced funding for Australian non-bank lenders throughout the pandemic,” he said.
According to Mr Kearns, this was in “stark contrast” to the GFC, which originated within US subprime securitisations and left investors wary of the entire asset class. He suggested that post-GFC reforms have made the financial sector more resilient.
“Had the financial system been as fragile as it was in 2007, the consequences of the pandemic would have been much more severe,” said Mr Kearns.
“Instead, in 2020, our financial system was well positioned to absorb, rather than amplify, the pandemic shock. Banks’ funding profiles and liquidity management were much more resilient, having benefited from important banking reforms implemented since the GFC.”
Mr Kearns said that it was pleasing to see that the securitisation market has played its part in a resilient financial system that mitigated the impact of the pandemic on the economy.
“This reflects the improvements in the securitisations market after the GFC, but also the impacts of various pandemic-era policy measures,” he said.
“The coming period will see further unwinding of those measures that have served their purpose and the development of new measures designed to make securitisation even more resilient.”
