Brisbane Times AAP October 24, 2012
The packaging of securities on financial markets had a key part to play in the way the global financial crisis spread from the US housing market, the Reserve Bank of Australia (RBA) says.
Speaking at the CPA Australia Finance and Accounting Expo in Sydney, the head of the RBA's financial stability department Luci Ellis said that while weakened lending standards in the US were now credited as causing the crisis, they were not widely appreciated at the time.
"Foreign observers like the RBA didn't realise how overstretched the US housing market had become, because there simply wasn't the data to show that lending standards had eased more in the US than elsewhere," Dr Ellis said.
"The US authorities and most other observers in the United States largely missed it, too - they weren't routinely comparing their situation with other countries and didn't see how exceptional it had become."
Changes to these practices often weren't visible in the usual data, with new, non-bank lenders accounting for most of the activity, Dr Ellis said.
But since many of these loans were pooled together into securities, it was inevitable that the weakness would spread.
"The securities backed by these mortgages were in some cases bought by foreign banks or their affiliates," Dr Ellis said.
"So instead of sweeping the risk out of the banking system, securitisation spread some of the losses through the banking system."
Investors were often unclear about the risks inherent in these securities, Dr Ellis said.
"The structures were quite opaque, and the language describing the underlying mortgages subprime, Alt-A, HELOC4 and so on, did not give a good sense of the quality of those loans," she said.
"Not only did they (policymakers) not appreciate how exposed the major global banks, and some minor ones, were to these bad assets. They also didn't appreciate how much everyone would panic because they didn't know which of their counterparties were exposed to those bad assets, and how far the prices of the securities would decline."
"Banks became unwilling to lend to each other on an unsecured basis, and the price of such lending rose drastically."