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Mortgage funds to 'put up or shut up' under deposit guarantee.



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2CN AM Mortgage funds to 'put up or shut up' under deposit guarantee

29/10/2008

Mortgage funds to 'put up or shut up' under deposit guarantee

AM - Wednesday, 29 October , 2008 08:11:00

PETER CAVE: So how just realistic is the Government's proposed solution to ease potential runs on mortgage funds and cash management trusts?

Some experts believe that a deal for greater regulation in return for the deposit guarantees puts funds in a position of either having to put up or shut up.

There's also a chance that even if some funds open themselves to tougher scrutiny, it might have the effect of creating more instability in the financial markets.

Here's our business editor Peter Ryan.

PETER RYAN: The Government's offer of greater regulation in return for possible access to the deposit guarantee comes after a week of intense lobbying from the funds management sector.

So far, no fund has commented on the offer preferring to scrutinise the fine print, which doesn't surprise former regulator and merchant banker Dr Carolyn Currie, who sees fresh problems instead of solutions.

CAROLYN CURRIE: Not only have we induced a moral hazard now that we have to watch out for, by giving these guarantees, we also can induce the feeling or the panic knee-jerk reaction that people just want to get out of everything and get into a bank.

Now this is the most dysfunctional type of movement that an economy can endure.

PETER RYAN: Dr Currie says the Government's proposal is unrealistic, and that the regulatory hoops funds need to satisfy are more of a discouragement in a tight lending environment.

In essence, according to Dr Currie, the Government is telling the funds industry to put up or shut up.

CAROLYN CURRIE: Under the rules to get a banking license, you have to have 15-million in capital; I believe that's the latest figure. Your whole board of directors has to be vetted as a fit and proper person, now funds don't have a board of directors they have a funds management company. Now the funds management company has various people on it, but they're not subject to the same type of checks that a board of directors of a bank is.

The other thing you need to have to do is have all your assets risk rated and you have to be checked out for operating risk and interest rate risk and market risk.

So they're going to have to raise capital in the market that is loathed to invest anywhere.

PETER RYAN: So realistically it's not something that these bodies are going to want to take on?

CAROLYN CURRIE: Look, realistically, investors have got to realise that they went in there, quite greedily wanting higher returns than they could get with a bank deposit, and thinking that they had the same liquidity as an overnight bank deposit.

Now, no investor in their right mind could equate a deposit at a bank, with an investment in a cash management trust, or in a mortgage fund.

PETER RYAN: If any funds do take up the offer, there's also the risk of reduced competition as mortgage funds and cash management trusts mirror banks in terms of trust and capital strength.

Professor Fariborz Moshirian of the University of New South Wales says banks might be forced to acquire potential threats.

FARIBORZ MOSHIRIAN: Banks might find it attractive to basically absorb the healthy mortgage funds, because they are not very large at the end of the day, we're looking at $14-billion, and I think by doing that they might basically increase their market share.

On the other hand, some other private sectors might come in and make mortgage funds stronger under the supervision of APRA where then they can offer better basic rate of return to investors.

PETER CAVE: Professor Fariborz Moshirian of the University of New South Wales ending that report from our business editor Peter Ryan.

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