26 March 2018
Protecting investors through ‘skin in the game’
Despite the complex name, securitisation is a simple concept. Securitisation is taking an illiquid pool of assets and converting them to liquid securities. Securitisation got a bad rap in the wake of the GFC, but in Australia, there are important differences to the “sub-prime” market in the USA. This video explains the basics of this widely misunderstood asset class.
Key facts about securitisation in Australia:
- The seller (originator) of an asset backed security must have ‘skin in the game’,
- The originators in Australia are major banks and Authorised Deposit-taking Institutions (ADIs),
- Securities can be backed by mortgages, credit cards, personal loans, or auto loans,
- In the event of default, the originator takes losses before the security holder,
- These securities generally attract a yield premium of up to 100 basis points over comparable corporate bonds,
- Losses in the USA pre-GFC peaked at ~12% due to fraud and poor lending practices. In Australia, long-term losses average less than a quarter of a percent,
- Due to the credit protections, no bond holder has ever incurred a loss in Australia.