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January 18, 2008

Australian financing vehicles exposed to commercial paper

by Richard Kilner

Story link: Australian financing vehicles exposed to commercial paper

A number of financing vehicles used by Australian banks to package mortgages for offshore investors have had to be rescued.

The vehicles are thought to have been exposed to commercial paper to the tune of $26bn.

Banks back the vehicles financially, though technically the vehicles remain independent and as such do not trouble balance sheets.

Commercial paper has been one of the areas hit hardest by the US subprime mortgage crisis.

Despite the Australian difficulties, the situation there remains less severe than that faced by commercial paper in the US itself.

Comemrcial paper only accounts for 2.3% of the risk-weighted assets of big Australian banks, but 10% of major US banks’ riskier assets.

The credit crunch, caused by the US subprime mortgage crisis, began in August, since when the interbank swap rate spread has risen eightfold from only 10 basis points to 80.

The Reserve Bank has cited the rapid decline of commercial paper’s collateral liquidity as the prime cause of repayment difficulties.

The commercial paper market permits banks to keep mortgages off of their balance sheets, allowing capital to be spent on expansion.

However this benefit will be reduced when new adequacy rules come into effect forcing banks to put aside capital to cover their liquidity guarantees.

 

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