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Knockon Effects Of The Us Subprime Meltdown On Australia


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Knockon Effects Of The Us Subprime Meltdown On Australia

  1. 1. Impact on the Australian market of the US sub-prime mortgage meltdownLeo Tyndall, Tyndall Capital May 2012
  2. 2. Overview Why did it happen When did it happen What happened Knock on effect to Australia Government response Market response Long term effects Euro crisis and its effect on Australia Additional reading material 2
  3. 3. Why did it happen Subprime market  Capital markets suffer difficulties – Term mismatch – Reset shock – Complex instruments – Poor risk assessment – Pass-through – Declining underwriting strategies – “no skin – Declining house in the game” prices – Rating agency reliance 3
  4. 4. When did it happen Early signs of  Bear Sterns bought  Lehmans deteriorating portfolios by JP Morgan at bankrupty Falling US house prices 10ct a share  TARP implemented Arrears on home loans  Banks cut lending  Goldmans Sachs, rising  CP conduit funding Morgan Stanley Liquidity squeeze by mid slowed or halted become banks year  SLN(RMBS  Merrill Lynch extendible CP) merge with BOA halted  Wells and Wachovia Bank merged 4
  5. 5. What happened Liquidity squeeze – Interbank lending stopped – Investors returned to cash – Retail customers lost faith in banking sector to the extent certain banks suffer significant withdrawals – SIVs collapsed – Bond spreads widen ten fold or more 5
  6. 6. Knock on effect to Australia 6
  7. 7. Knock on effect to Australia Non bank institutions relying on offshore funding collapsed or retreated: – Basis capital, Allco, Elderslie – RHG Securitisation market halted – 2008 – 1 deal issued without AOFM assistance – Australia CP market halted, resulting in banks being called on their liquidity facilities – Term issuance margins increased signficantly and resulted in some issuers cancelling transactions – Foreign banks retreated from the Australia market 7
  8. 8. Knock on effect to AustraliaAustralia is not an island in the capital markets Knock on effect to Australia Source:RBA, UBS, S&P 8
  9. 9. Government response 1st stimulus package - October 2008, the Rudd government announced that it would guarantee bank deposits An economic stimulus package worth $10.4 billion was announced AOFM to purchase RMBS RBA repo eligibility to include ABS Regulatory changes – major changes – National Consumer Credit Code – Personal Property Securities Act – Rating agency regulation – APS 120 – align to Basle 2 and consequently Basle 3 – Amendment to Banking Act – Covered Bonds allowed 2nd economic stimulus package - February 2009, $47 billion was allocated to help boost the economy 9
  10. 10. Market response Pros – Securitisation market showed a signs of recovery 10
  11. 11. Market response Pros – Other investors supported securitisation along side the AOFM participation 11
  12. 12. Market response Cons – RMBS Securitisation remains at significant low levels due to the inability to offer bullet structures and minimal offshore participation 12
  13. 13. Market response Cons – Credit enhancements level set by the rating agencies increased causing inefficient pricing; – Funds suffered significant redemptions and do not want to participate in any asset purchase where liquidity in secondary market is slow; – Foreign banks retreated from the markets; – Major domestic banks hold more than 90% of the market share in mortgages – Conduit funding is no longer an economical solution for banks and funders – Covered bonds only helped the major banks due to the inability to offer a support solution for the lower rated banks – Investment banking model is not considered an attractive solution for most banks. Accordingly innovation and competition is close to non existent in the Australian market – Issuers need mezzanine funding but pricing is high due to few participants in the market 13
  14. 14. Long term effects Subdued home lending Increase in securitisation of asset backed securities 14
  15. 15. Long term effects Slowing in the retail credit market consequently slowing economy – Pharmacy industry suffering reductions in credit facilities – Residential lending criteria tightening resulting in a slowdown in housing industry – SME suffering credit crunch due to an reluctance by the major banks to lend in the sector – Less competitions due to foreign banks withdrawing from the market 15
  16. 16. Solutions Call support Covered bond support Mezzanine funding solutions Require super funds invest in fixed instruments up ?% Support competitors in the market to the majors Regulate them with APRA – e.g. Housing Coops. 16
  17. 17. Euro Crisis – its effect to Australia Foreign banks retracting from the market – Syndicated loan market slowed – Commercial property market slowed – Project finance slowed – Unemployment increased – out of work bankers, property professionals, project finance professionals Inability for the majors to handle the increase in demand – Majors become selective – Pricing increases – Smaller player squeezed out due to funding constraints – Reduced competition 17
  18. 18. Additional reading material (RBA paper, 2008, address to the Sub-prime Mortgage Meltdown Symposium) http :// 18