For his keynote address to the Australian Securitisation Forum's annual conference yesterday, David Jacobs, head of domestic markets at the Reserve Bank of Australia, set out to explain why securitisation continues to matter to the economy, in the face of systemic risks to securitisation markets.
“2024 has emerged as the strongest year for issuance in over a decade, relative to the size of the economy," he said.
"The market has been underpinned by strong investor demand, which has driven spreads lower despite high issuance."
He showed that cumulative ABS issuance in 2024 is at its highest level in a decade, well above the average from 2013 to 2023.
"Securitisation ... remains a stable source of funding for credit, and has shifted in three interesting and important ways"
Jacobs expanded on this: "issuance has increasingly come from non-banks; the composition of borrowers has broadened toward those with less access to bank credit; and ... investor demand is supported by increased participation from foreign investors."
From here, Jacobs made three further observations on the evolution of securitisation in Australia:
"This [expanded issuance] has allowed more households and businesses to borrow, especially some that have less access to credit from more traditional lenders, such as those who can't easily provide the usual income verification and for vehicle financing," Jacobs said.
That is valuable for competition and innovation in the market for household and business lending.
He then observed that in servicing a broader group of borrowers, non-bank lenders have increased some types of higher-risk lending, leaving the system a little more vulnerable to a shock.
But in other ways risk exposures have declined: "Overall there are limited signs of strain among borrowers so far. More generally, any risks to the broader financial system remain contained by the small size of the non-bank sector," Jacobs said.
And as for the current strength in investor demand, there may be a cyclical element to it which could turn if global financial conditions were to deteriorate, particularly with risk premiums compressed in many markets, Jacobs suggested. "But there also appears to have been a broader, structural deepening across different parts of the Australian domestic bond market," he said.
Nevertheless, the share of housing credit funded by securitisation has been broadly stable at around 6 per cent since 2016, despite the funding disadvantage.
First, rising interest rates since 2022 have tended to make wholesale sources of funds such as securitisation less competitive compared with deposits as not all types of deposits pay interest and also deposit funding tends to reprice at a slower pace than funding from securitisation.
The resumption of bank bond issuance with the end of the Term Funding Facility has not, however,r seen crowding out of the ABS market.
Jacobs suggested a few reasons that have allowed the ABS market to remain so resilient:
• flexibility in securitisation business models, in particular, with more lenders entering the market, with the number of non-bank ABS issuers up from around 15 in 2019 to 40 in 2024 –accounting for most ABS issuance in recent years and much of the growth in the market in that time – whereas the number of bank issuers has been fairly stable in the last decade;
• the share of residential mortgages funded by securitisation have shifted toward investor loans and low or alternative-documentation loans, which require less or alternative verification of income or assets as reflected by non-banks' increased share of the market, as they target their lending more towards these segments than banks; and
• non-banks have also increased their share of these types of lending within their portfolios over time, while banks' broader mortgage portfolios have shifted a little away from low-/alt-doc and investor loans.
"On the surface that might also suggest a shift to riskier loan segments, but ... there has been shift away from high-loan-to-valuation lending and interest-only lending," Jacobs said.
"The securitisation market has also extended credit to a wider range of borrowers, against a wider range of collateral.
"Non-bank lenders, in particular have extended their presence to areas such as vehicle and equipment finance and lending to small and medium enterprises – areas less serviced by traditional finance."
Jacobs said that "risks from non-bank lenders are currently somewhat limited by the small size of the sector, limited connections to the rest of the financial system, and their funding being sourced mainly from sophisticated investors".