What Makes the “Big Short” Fail on Australian RMBS?

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The Australian residential mortgage-backed securities (RMBS) market is a very different creature from the one depicted in The Big Short, and for investors, that is a good thing.

The release of The Big Short in 2015 was a game-changer for the public’s understanding of finance. Paramount’s film adaptation of Michael Lewis’ nonfiction financial thriller opened the eyes of many to the complexities and nuances of the mortgage market, namely within the United States.

One particular area that drew attention was the concept of Residential Mortgage-Backed Securities (RMBS).

Wall Street’s risky business with subprime mortgages

In 2010, the blockbuster film of the same name educated the masses on the origins of the Global Financial Crisis (GFC) using an all-star cast and a scathing sense of humour.

At its heart, The Big Short is about how Wall Street got away with mortgaging securities backed by subprime mortgages destined to fail.

However, while the film focused on US RMBS, Australian RMBS are significantly different in structure, composition, and risk. For one thing, Australia has strict regulations governing mortgage lending, which have protected investors from falling victim to some of the same pitfalls as those in America.

“No rated Australian mortgage bond in history has ever suffered a permanent loss of capital,” said Timothy Dowling.

Australian investors are exposed to less risk than US investors

Furthermore, most of Australia’s RMBS market is backed by prime residential mortgages rather than subprime, as seen in the US at the time. This means Australian investors avoided exposure to much higher risk levels than those who invested in American securities pre-GFC.

Ultimately, Australians were not subject to The Big Short type scenarios because our stricter regulations meant we did not experience anything close to what happened there.

However, only some understand that RMBS markets can differ significantly from country to country, particularly in Australia.

While The Big Short depicts an American RMBS market rife with subprime mortgages and riskier investments, this does not reflect the Australian market. Australia has one of the world’s most secure and well-regulated banking systems, and its RMBS market reflects this level of security.

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