Initially the RBA accepted only the asset backed securities that were eligible for sale in the wholesale markets, however as the crisis worsened the RBA started to accept internal securitisation securities. Internal securitisation is where a licensed bank sells a pool of mortgages to a related special purpose vehicle SPV , and this SPV issues debt securities which are held entirely by the licensed bank which originated the mortgages.
The sole purpose of these asset backed securities is to use as collateral with the RBA in its repurchase agreement program, that is these securities are not available to investors on the wholesale markets.
Graph 3 shows the significant growth in total bank and securitisation loan net transactions new loan issuance less repayments in the 10 years before the GFC.
This growth was related to financial liberalisation in Australia from the early s, plus lower interest rates and inflation making it cheaper to borrow. As the GFC hit there were impacts on the 'on market' securitiser loan market Graph 3 , with negative net loan transactions where repayments were larger than new loan issuance from September quarter through to March quarter There were significant net loan repayments in the December quarter and from the June quarter to December The main factor driving negative growth in securitised loan assets was the oversupply of RMBS in the wholesale markets.
With the onset of the GFC, reduced demand from overseas investors resulted in a sell off of the RMBS into the domestic market as overseas investors liquidated their portfolios. As a result, cost of purchase of these securities was prohibitive to make new issuance of securities economic. Soon after the GFC, the Commonwealth government implemented a policy to support competition in the residential mortgage market by purchasing new RMBS issues within the 'on market' securitisation market.
In the last three years the Commonwealth government has been gradually divesting the RMBS as the 'on market' securitiser market began to recover. Graph 3 shows that overall the banks loan market including the internal securitised market significantly slowed during the GFC.
This reflected difficult credit conditions in the global wholesale markets; cautious behaviour by households; slowed economic activity; and stronger lending standards. Bank loan market growth picked up in reflecting ongoing strength in deposit funding for lending and less reliance on wholesale funding. It slowed down again in reflecting deleveraging behaviour by households and business, and also business moving more towards wholesale markets for their funding.
Since then there has been an overall slowdown up to September quarter with some volatility. This coincides with tighter lending standards with investor housing slowing in particular in , collateral requirements for higher-density residential projects and other commercial property development, and banks reduced exposures to resource related businesses. Graph 3 shows the net positive transactions of the internal securitised loans evident during the GFC, as banks obtained funds from the RBA repurchase agreement program.
Internal securitisation remained subdued from until the sovereign debt crisis in Europe in , where transactions in internal securitisation can be observed as banks prepared for the deterioration in the credit markets, and planned to have RMBS ready for future transaction in the repurchase lending program with the RBA. The CLF ensures that participating banks have enough access to liquidity to respond to an acute stress scenario.
To meet the regulatory requirements set by authorities, the internal securitisation market of banks increased significantly up until when the CLF was introduced. The national general Commonwealth government contributes to economic growth through spending on final consumption and investment. Prior to the GFC, this expenditure and investment was mostly funded through substantial gross saving driven by growth in tax receipts. During this time the national general government was in a net lending position allowing it to invest in the financial markets or pay off liabilities.
Since September quarter , the national general government has been in a net borrowing position. Graph 4 shows the government expenditure to stimulate the Australian economy during the GFC negative gross saving. In the years after the GFC, and up to early , the national general government had been in a net borrowing position, however this borrowing is declining, reflecting improved taxation receipts from corporations due to increased profits related to commodity prices and increased compensation of employees.
Graph 5 shows the national general government total outstanding liabilities. Graph 5 shows that the national general government funded its net borrowing from the onset of the GFC and up to September quarter by issuing substantial amounts of long term bonds. Graph 6 illustrates the ownership of national general government bonds. Ten years prior to the GFC, institutional investors pension funds, life and general insurers and investment funds were the major investors, however their investment declined and foreign investors took up this declining share as the GFC approached.
Since the GFC, foreign investors have been the major investor in these bonds. Graph 6 shows the increasing investment by banks since the GFC, reflecting tightening of regulative standards with banks required to hold a certain amount of high quality low risk assets. The institutional investors investment increased in line with total national general government issuance, and central bank investment increased from and reflects the use of these bonds in the repurchase agreement program.
Household net worth Graph 7 has grown in the decade prior to the GFC and after the GFC up to September quarter , with favourable borrowing conditions and asset price growth.
Many banks around the world incurred large losses and relied on government support to avoid bankruptcy. Millions of people lost their jobs as the major advanced economies experienced their deepest recessions since the Great Depression in the s.
Recovery from the crisis was also much slower than past recessions that were not associated with a financial crisis. As for all financial crises, a range of factors explain the GFC and its severity, and people are still debating the relative importance of each factor. Some of the key aspects include:. In the years leading up to the GFC, economic conditions in the United States and other countries were favourable. Economic growth was strong and stable, and rates of inflation, unemployment and interest were relatively low.
In this environment, house prices grew strongly. Expectations that house prices would continue to rise led households, in the United States especially, to borrow imprudently to purchase and build houses.
A similar expectation on house prices also led property developers and households in European countries such as Iceland, Ireland, Spain and some countries in Eastern Europe to borrow excessively.
Many of the mortgage loans, especially in the United States, were for amounts close to or even above the purchase price of a house. Banks and other lenders were willing to make increasingly large volumes of risky loans for a range of reasons:.
In the lead up to the GFC, banks and other investors in the United States and abroad borrowed increasing amounts to expand their lending and purchase MBS products. Borrowing money to purchase an asset known as an increase in leverage magnifies potential profits but also magnifies potential losses. Additionally, banks and some investors increasingly borrowed money for very short periods, including overnight, to purchase assets that could not be sold quickly.
Consequently, they became increasingly reliant on lenders — which included other banks — extending new loans as existing short-term loans were repaid.
Regulation of subprime lending and MBS products was too lax. In particular, there was insufficient regulation of the institutions that created and sold the complex and opaque MBS to investors.
Not only were many individual borrowers provided with loans so large that they were unlikely to be able to repay them, but fraud was increasingly common — such as overstating a borrower's income and over-promising investors on the safety of the MBS products they were being sold.
In addition, as the crisis unfolded, many central banks and governments did not fully recognise the extent to which bad loans had been extended during the boom and the many ways in which mortgage losses were spreading through the financial system. The catalysts for the GFC were falling US house prices and a rising number of borrowers unable to repay their loans. House prices in the United States peaked around mid , coinciding with a rapidly rising supply of newly built houses in some areas.
As house prices began to fall, the share of borrowers that failed to make their loan repayments began to rise. Loan repayments were particularly sensitive to house prices in the United States because the proportion of US households both owner-occupiers and investors with large debts had risen a lot during the boom and was higher than in other countries.
Stresses in the financial system first emerged clearly around mid Some lenders and investors began to incur large losses because many of the houses they repossessed after the borrowers missed repayments could only be sold at prices below the loan balance. Relatedly, investors became less willing to purchase MBS products and were actively trying to sell their holdings. The banks were rescued in the nick of time, but it was too late to prevent the global economy from going into freefall.
Credit flows to the private sector were choked off at the same time as consumer and business confidence collapsed. All this came after a period when high oil prices had persuaded central banks that the priority was to keep interest rates high as a bulwark against inflation rather than to cut them in anticipation of the financial crisis spreading to the real economy.
The winter of saw co-ordinated action by the newly formed G20 group of developed and developing nations in an attempt to prevent recession turning into a slump.
Interest rates were cut to the bone, fiscal stimulus packages of varying sizes announced, and electronic money created through quantitative easing. From this point, when the global economy was on the turn, international co-operation started to disintegrate as individual countries pursued their own agendas. By the time the IMF and the European Union announced they would provide financial help to Greece, the issue was no longer the solvency of banks but the solvency of governments.
Budget deficits had ballooned during the recession, mainly as a result of lower tax receipts and higher non-discretionary welfare spending, but also because of the fiscal packages announced in the winter of Greece had unique problems as it covered up the dire state of its public finances and had difficulties in collecting taxes, but other countries started to become nervous about the size of their budget deficits.
Austerity became the new watchword, affecting policy decisions in the UK, the eurozone and, most recently in the US, the country that stuck with expansionary fiscal policy the longest. This could hardly have come at a worse time, and not just because last week saw the biggest sell-off in stock markets since late Policymakers are confronted with a slowing global economy and a systemic crisis in one of its component parts, Europe.
To the extent that they are united, they are united in stupidity, wedded to blanket austerity that will make matters worse not better. And they have yet to tackle the issue that lay behind the crisis in the first place, the imbalances between the big creditor nations such as China and Germany , and big debtors like the US. In the circumstances, it is hard to be wildly optimistic about how events will play out.
The reason for that is simple: Japan's growth prospects are poor. So are America's, which is why bond yields will remain low in what is still, for the time being, the world's biggest economy.
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