Securitisation, structural changes of Australian mortgage markets and bank pricing behaviour

Abstract

This paper examines the growth of securitisation and structural changes in the Australian mortgage market, and their impacts on bank pricing behaviour. Since the mid-1990s, mortgage securitisation has dramatically increased and thus intensified competition between traditional banks and mortgage corporations (new entrants). In the meantime, to respond to the competition, banks largely reduced their mortgage interest rates. However, there is no empirical study on what contributed to their price reductions. We present a simple model to illustrate potential factors that may affect bank pricing behaviour. It is the first time to investigate this issue from both perspectives of cost-effects and market structural changes associated with securitisation at the same time internationally by testing four major bank data. It finds that lender yield spreads (between the bank and mortgage corporation) are significantly related to bank market share, existing and new loan concentration indexes and the growth of securitisation, respectively. Findings further indicate that declined concentration and increased competition have significantly caused lender spread changes. The findings are consistent with both securitisation literature and price-concentration studies.