The chairman of the Australian Securities & Investments Commission has broken ranks with Treasurer Wayne Swan on reform of the bond market, saying that any move to establish a retail corporate bond market must wait until there is a deep and efficient wholesale market for them.
Greg Medcraft, who spent two decades as a fixed interest specialist with French bank Societe Generale before joining ASIC as a commissioner, was reacting to Mr Swan's announcement last week of plans to facilitate a retail market in the bonds, which pay higher rates of interest than government bonds.
Choosing his words carefully, Mr Medcraft said Australia should be taking "baby steps" to establish a more liquid wholesale corporate bond market first. This was likely to happen as new market forces acted to limit the bank lending market.
"If we develop a wholesale market first, that will underwrite the liquidity of the retail market," he said. "In the wholesale market there are supply and demand factors that are in play."
On the supply side, he said banks nervous about the Basel III rules were shying away from making big corporate loans, which would require significant capital reserves to be held against them under the new regulations.
"Basel III will provide a significant incentive for the banks to push corporates to the bond market," he said.
On the demand side, he said: "There will be a major demographic impetus for institutions to hold bigger fixed-interest holdings on behalf of an ageing population concerned about their excessive reliance on the equity market for superannuation performance.
"If you get the wholesale side going, retail will follow. I'm a great believer in the market working these things out."
The federal government has been looking for ways to give retail investors an alternative to sharemarket investments, and reforms introduced last week introduce a streamlined disclosure regime for companies with good records.
The proposal is that companies with good continuous disclosure records be excused the expense and delay of sending out a full prospectus to potential investors if they have already issued one in the past three years. Civil liability provisions for companies issuing corporate bonds to retail investors would also change under the reforms.
Mr Medcraft noted that large corporates had already discovered it was cheaper to borrow money on the corporate bond market than from banks, an advantage that was likely to be magnified by the arrival of the Basel III impositions on capital reserves. "We're probably going to see an environment where the corporate bond market in Australia will grow,' he said.
Mr Medcraft said Australia currently had an unbalanced situation with an excessive reliance on equity and an immature corporate bond market. He said government encouragement would be useful, but would end up playing a secondary role in creating a "deep and relevant" market through which Australian corporates could raise debt more cheaply than they could now.
Source:
http://www.theaustralian.com.au/business/markets/asic-chair-urges-baby-steps-for-bonds-plan/story-e6frg916-1226554655533
