More details have come to light about the move by Macquarie Bank to try and “game” the European Central Bank (ECB) into advancing it a loan against a security backed by Australian car loans, but issued through an Irish affiliate.

It seems that there is considerable support at all levels of the market in Australia for what Macquarie has managed to do and continues to do because it exposes the uneven nature of the relationship between the ECB and the rest of the world.

The ECB only accepts asset backed commercial paper securities issued by banks and other solid financial groups (investment banks) in the so-called Group of 20 major economies. The Macquarie move has certainly created a fuss among the financial chattering classes in Europe who seem affronted that a colonial (and one which started the dreaded infrastructure fund model) might be trying something daring.

Of course the real scandal with the ECB liquidity support program is the way Spanish banks are sucking up tens of billions of dollars a day to ride out the implosion of their property sector, not what Macquarie might be doing.

While the ECB rules Australian bank issued paper out of its dealings with financial institutions, our regulators, including the Reserve Bank, accept commercial paper issued by high rated banks and other institutions outside the G-10, so that asset backed paper issued or repackaged and including securities issued by the likes of supra national agencies, national agencies in Japan or Europe, or from NZ, might be acceptable.

What Macquarie did was to package up the Australian car loans in such a way and then issue it through its Irish affiliate to prove that securities created by an Australian financial institution could be acceptable to the ECB, and more importantly, to other market-based buyers.

There is an important point here for other Australian banks looking for ways to try and re-open markets that have been closed by the credit crunch, such as securitised home loans or Australian car loans.

In Europe paper that is acceptable to the ECB as security for a central bank liquidity support loan is cheaper and is seen as a bit more “secure”. It’s much easier for the buyer if it’s acceptable to the ECB. Therefore it has a lower cost and the issuing institution has a lower cost for the funds raised.

By using its Irish affiliate, Macquarie has proved that Australian created securities backed by car loans (or even housing loans for that matter) are acceptable to the ECB as security and therefore there’s a market there for it and other Australian banks looking to restart their securitisation programs.

It’s a small step at the moment but with potential: Macquarie managed to get upwards of $A700 million from the ECB. That it had to go through the subterfuge of issuing the paper through an irish affiliate says more about the rules and requirements of the ECB than anything else.

There’s no doubt the key local regulators, the Reserve Bank and APRA are watching what Macquarie is doing very closely to make sure there’s no funny business (which there isn’t) but to see if it can force other banks to follow and restart home loan securitisations in particular. That remains a key objective for the RBA and its one of the subsidiary reasons why we are getting an interest rate cut today.

If Macquarie can do it, there’s no reason why St George, Westpac and others can’t follow suit, or use Macquarie’s new ‘conduit’ for some nice fees, of course. Why, we could see non bank home lenders back in the market with products early in 2009 if it leads to more issues.

Peter Fray

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