Hoarding cash is catching on. The US, EU, UK, and now Australia banks are all in on the act. In response the Oz central bank …. drum roll please …. institutes a swapping mechanism.

Let’s take a look at how Oz Banks prepare for worst.

The RBA’s assistant governor of financial markets, Guy Debelle, has revealed eight Australian banks had taken the advice of the central bank and APRA, the prudential agency, to package and securitise residential mortgages which had been held on their balance sheets.

The move would allow the banks to effectively swap the residential mortgage-backed securities (RMBS) with the Reserve to secure funding quickly if it was facing a liquidity shortfall.

The increased demand for funds came after banks became hesitant to lend to each other, preferring instead to hoard cash. “If the Reserve Bank had not increased the supply, the cash rate would have risen above the target set by the Reserve Bank Board as financial institutions bid harder for funds in an attempt to increase their cash balances,” Dr Debelle said.

To date, eight institutions have created these “self-securitised” RMBS and several more are in the process of doing so.

This is the problem right here: “If the Reserve Bank had not increased the supply, the cash rate would have risen above the target set by the Reserve Bank Board“.

Just like in the US, Oz bankers think they know where interest rates should be. The market tries to take rates one direction, but the central bank defends its “mother knows best” rate.

Well mother does not know best in the land down under anymore than Greenspan knew what was best for the US. These actions of second guessing the market is what creates bubbles in the first place. There is obviously an overpowering force compelling bankers and politicians to do something when the best thing to do is nothing at all.

By the way, the idea that something can be “self-securitised” is absurd as putting an IOU in a piggy bank and claiming you owe yourself money.

Mike “Mish” Shedlock
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