The impact of securitisation and structural changes of the Australian mortgage markets on bank pricing behaviour

This paper investigates the impact of securitisation and structural changes of the Australian mortgage market on bank pricing behaviour. Since the mid-1990s, securitisation has dramatically increased and, thus, intensified competition between banks and mortgage corporations (new entrants). To respond to the competition, banks largely reduced their mortgage interest rates. However, there is no study on what caused their price reductions. We present a simple model to explain the potential factors that may affect bank behaviour. This is the first examination of the issue from both the perspectives of cost effects and market structural changes by testing four major bank data. It finds that lender yield spreads are significantly related to bank market share, existing and new loan concentration indexes and securitisation, respectively. The findings further indicate that declined concentration and increased competition have significantly caused lender spread changes. The findings are consistent with both the securitisation literature (e.g., Gorton and Pennacchi, 1995; Kolari et al., 1998; Ambrose et al., 2004) and price concentration studies (e.g., Berger and Hannan, 1989).