Comment: Yield-hungry instos ready to make corporate loans

Kevin Davis
On 18 March 2015, the Australian Centre for Financial Studies hosted a roundtable to discuss the end of quantitative easing and its consequences. Yesterday, Kevin Davis, ACFS research director, published an outline of the key points raised by the 15 participants (academics, economists, credit analysts and senior investment professionals from across the financial services industry and ACFS staff).

"Although there has been no QE in Australia, global monetary developments have had a significant effect on the configuration of Australian exchange rates, interest rates and asset prices," Davis wrote.

The phrase QE was first applied to Japan in the 1990s, where the Bank of Japan purchased government securities from the banking sector, thereby boosting the level of cash reserves those banks held in the system.

"The hope was that by targeting a high enough level of reserves, this would eventually spill over into lending into the broader economy, helping drive asset prices up and removing deflationary forces," Davis wrote.

This led the group to consider how the search for yield in a low interest rate environment might evolve. One question was asked and answered: where investment managers may look to enter the space traditionally occupied by banks by engaging in direct lending.

"There is an apparent disconnect between low interest rates in Australia and the lack of growth in credit to households (outside of mortgages) and small businesses," Davis wrote.

"Most participants agreed that governments should take advantage of low interest rates to finance productive infrastructure and 'de-risk' greenfield projects to make them more attractive to private investors."

* Kevin Davis is Research Director at the Australian Centre for Financial Studies. A complete version of the report can be accessed here.