Sunlight still the best disinfectant

Investors are – predictably – taking tougher attitudes to offers of Asset Backed Commercial Paper.

That is a natural product of the US sub-prime mortgage crisis.

The Reserve Bank tracks the development, in an article it published yesterday in its monthly bulletin.

It notes that ABCP investments still have advantages.

“Notwithstanding the recent difficulties in this market, ABCP, like other forms of securitisation can allow financial institutions to diversify their sources of funding ,” the bank said.

It also said that these instruments also enable credit risk to be packaged and sold to meet the preferences of investors.

But, to put it mildly, there are issues, too, as the bank noted.

“Recent events have, however, highlighted a number of issues that are likely to receive ongoing attention.

“One of these is the important role of transparency in the smooth operation of the market,” the bank said.

It said investors are now reluctant to roll over these short term instruments, because of what it called the “opacity” of the market.

Obscurity, that is, both in the composition of asset pools, backing ABCP and in the lack of publicly quoted prices.

Putting it simply, the bank said investors are now demanding more transparency in this area.

As the late Ralph Jacobi MP used to say, about such matters:” Sunlight is the best disinfectant.”

www.rba.gov.au