Originators of residential mortgage-backed securities (RMBS) need to continue to focus on transparency and the quality of information provided to investors when selling such assets, the Reserve Bank of Australia (RBA) says.

RBA assistant governor for financial markets Guy Debelle said on Wednesday key was good information on asset pool performance, the creditworthiness of the borrowers of the loans underlying RMBS and holding “skin” on the assets that are securitised.

“There has been much discussion about requiring originators/sponsors to retain a long term exposure to assets they securitise - so-called skin in the game requirements,” he said during a speech at the Australian Securitisation Conference in Sydney.

“Even before the financial crisis there was a tendency for many Australian securitisers, or related parties, to hold skin in the game.

“In the US, and some other markets, where the originate-to-distribute model was prevalent, there were some problems of incentives between originators and investors not being aligned, though this was not really the case with Australia RMBS.

“Nonetheless, to maintain an overseas investor base going forward, the Australian market may need to consider global standards.”

Mr Debelle stressed that transparency and quality of information was high on the radar of policy makers.

“Clearly, disclosure of information to investors, such as the initial and ongoing performance of the asset pool and the creditworthiness of the borrowers of the underlying loans, is important,” he said.

“The Australian market should look to continue to provide good quality information such as this.”

Mr Debelle said Australian RMBS were not excessively risky compared to their US counterparts, and this fact needed to be highlighted.

“This message probably doesn’t need to be delivered to the portfolio managers,” he added.

“It needs to be delivered to the superannuation trustees whose views may be affected by continual media exposure to the US experience that securitised assets are excessively risky.

“The Australian industry needs to differentiate its product from the US brand.

While commentators were right to sing the praises of the Australian securitisation market prior to the global financial crisis, he acknowledged there were shortcomings.

“Prior to the crisis, many commentators sung the praises of securitisation as a useful means of dispersing risk around the financial system, and in principle I think they were right,” Mr Debelle said.

“There were, however, some major shortcomings in the implementation of securitisation.

“While I expect securitisation to make a solid return, I do not expect it to be as large a part of the market as it was in 2007 anytime soon.”

Mr Debelle compared the recent history of securitisation to junk, or sub-investment grade, bonds, which became popular in the late 1980s.

Like those bonds, he said, RMBS would return in popularity but take a smaller share of the market space.

“Both grew too rapidly and expanded into areas they shouldn’t have and were bought by investors who shouldn’t have bought them,” he said.

“Both played important roles in generating financial dislocation.

“Just as junk bonds are now a regular (but smaller) part of the financial landscape, I believe securitisation will be similar in the future.”

The stock of Australian RMBS had declined by more than 40 per cent from its peak in 2007, creating “holes” in investors’ portfolios, particularly as credit spreads continue to narrow.

“Hence I think there are good reasons to believe that the signs of life that we have seen in the market in recent months presage more activity to come in the near future,” Mr Debelle said.

AAP