According to two leading economists, Melbourne Business School's Joshua Gans and Christopher Joye, the global credit crisis will squeeze out smaller banks such as the Bank of Adelaide and Bendigo Bank, as well as non-bank lenders such as Aussie Home Loans, Bluestone and Liberty, which will significantly reduce competition and lead to permanently higher interest rates in the home lending market.
Competition from non-traditional home-lenders has brought the difference between standard variable home loans and the bank-bill rate, which sets bank funding costs, down from 4 per cent in the early 1990s to 1.4 per cent today.
Dr Joye said this gain would be reversed unless the Government acted to support the mortgage security market.
While the major banks use their retail and corporate deposits to finance most of their mortgage lending, smaller banks and non-banks bundle packages of their mortgages as collateral for bonds that are issued to investors, such as superannuation funds and other financial institutions.
For the past five years, about $50 billion a year of mortgage lending has been financed in this way, but since last year almost no mortgage-backed bonds have been issued.
There are calls for the Rudd Government to help small operators by using its AAA credit rating to boost funds available for home lending, similar to schemes already operating in the US and Canada.
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