Not all that long after the AOFM got out of the RMBS market, the Commonwealth appears ready to return. The Federal Government has announced it will establish a $2 billion fund to purchase securities backed by loans to small and medium-sized enterprises (SMEs).
The new fund, known as the Australian Business Securitisation Fund, will be created to increase the ease at which lenders to SMEs can finance loans of this type. In effect, it will add to demand these sorts of securities, thus allowing issuers to increase the supply without driving the price down (and the yield up). Alternatively, if the supply of securities from issuers does not increase, the additional demand will drive the price up, thus reducing the cost (yield) to issuers. In any event, lenders will have an incentive to increase lending to SMEs.
While the Federal Government’s sentiment is noble, anyone with a knowledge of the Tricontinental and State Bank of South Australia debacles in the late 1980s will be concerned. Non-performing loans provided by government-owned institutions to the business sector were behind the demise of each and eventually, tax-payers footed the bill. A less-generous interpretation of the government’s proposal is that it is just another version of a price-support scheme for holders of securities backed by loans to SMEs.