Josh Frydenberg (Kooyong, Liberal Party, Treasurer) Share this | Link to this | Hansard source

I move:

That this bill be now read a second time.

This bill introduced today will establish the $2 billion Australian Business Securitisation Fund (the fund). This fund will enhance access to debt finance for Australian small and medium businesses by improving smaller bank and non-bank business lenders' access to the Australian securitisation market.

Small and medium businesses, or SMEs, are at the heart of the Australian economy. Nearly 70 per cent of private sector employment is generated by small and medium enterprises. Creating the conditions that allow these small businesses to grow and thrive is critical to the prosperity of Australia.

One of the largest barriers these businesses face is accessing the affordable finance needed to support and grow their businesses. Many business owners cannot access finance without putting their home up as collateral and struggle to gain additional finance to grow once all of their real estate has been pledged. For those who can access finance, the interest rates charged are often high and the process of applying for finance is long and onerous.

A major underlying factor in the difficulties some firms face in accessing funds is the lack of competition in the market. Eighty per cent of small and medium enterprise lending is held by the major banks. There are a number of non-banks and smaller banks entering the SME market and targeting underserviced segments, but many of these lenders are constrained by their ability to access funding on competitive terms.

This bill seeks to increase competition in the SME lending market by unlocking securitisation funding for smaller lenders, which will allow them to compete more effectively against the major banks.

Securitisation is a method of funding whereby the cash flows from illiquid assets, such as loans, are packaged into tradeable debt securities that are generally tranched, with each tranche having different risk characteristics. The cash flows from the underlying loans are used to make interest and principal payments to investors in the securities. These securities often only have recourse to the underlying assets, with generally no recourse to the originator of the assets. Securitisation may be undertaken on a warehouse or term basis. Warehouses are securitisation facilities that allow a lender to fund loans until they have built up a large enough pool and track record to refinance them into the term securitisation markets.

Australia has a well-developed securitisation market for residential mortgages, which provides funding for a significant number of smaller bank and non-bank lenders. The securitisation market provides smaller lenders with access to new investors and a potentially cheaper source of domestic debt funding to enable them to compete with the major banks. The development of the residential mortgage backed securitisation market since the mid-nineties has significantly increased competition and lowered interest rates in the mortgage market.

The securitisation market for SME loans is currently very small, consisting of only a handful of deals a year. The SME securitisation market is constrained by a self-perpetuating lack of scale; low issuance means that potential investors are unwilling to undertake the due diligence needed to enter the market. However, the lack of investor interest constrains the issuance of new deals.

The fund will help break this cycle by stepping in as a patient investor that is willing to do due diligence despite the small scale of the market. This would accelerate the development of the securitisation market which would unlock a new sustainable funding source for smaller lenders.

The fund will allow these smaller lenders to compete more effectively in the SME lending market, which should improve borrowing conditions for the SMEs in the medium to long term. The fund builds on other government measures to improve small business access to finance, including supporting the creation of a private sector owned Australian Business Growth Fund and reforms such as open banking and comprehensive credit reporting.

Now to the provisions of the bill.

The bill will establish the fund and the fund's special account. The bill will credit $2 billion in increments into the special account between 1 July 2019 and 1 July 2023. Any proceeds of the fund will be returned to the special account, unless otherwise directed by the Treasurer.

The minister will be able to invest the moneys of the fund in eligible debt securities, namely Australian dollar denominated debt securities which are issued by a trust or special purpose vehicle. These eligibility requirements reflect standard securitisation market deal structures. These securities must be backed by SME loans, which are defined as business loans with a principal value of less than $5 million.

The bill provides the minister with the power to delegate certain powers to certain officials within the Department of the Treasury. Consistent with the government's public announcements, administration of the fund will be delegated to officials of the Australian Office of Financial Management (AOFM) within the Treasury.

The bill also provides the minister with the power to issue directions about the exercise of the minister's investment powers and to make rules. It is intended that the minister would issue an investment mandate that establishes more detailed rules for the fund, including further eligibility requirements, considerations the AOFM must take into account when selecting securities to invest in, financial performance requirements, risk management and transparency obligations.

The government has consulted on key features of the investment mandate and rules and will shortly release the proposed final versions of these instruments.

Finally, the bill includes provisions to ensure there is reporting of the activities and outcomes of the fund. Reviews of the fund will be undertaken two and five years after its establishment to consider its effectiveness in meeting the objectives set out in the bill. The reviews must be tabled within 15 sitting days of being provided to the minister. The bill also requires annual reporting on the operations of the fund.

Full details of the measure are contained in the explanatory memorandum.

Debate adjourned.