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APRA proposes simplified prudential framework for securitisation

Tuesday 29 April 2014


The Australian Prudential Regulation Authority (APRA) has released for consultation a discussion paper on its proposals to simplify the prudential framework for securitisation for authorised deposit-taking institutions (ADIs).

APRA’s proposals take into account the lessons learned from the global financial crisis — in particular, that securitisation globally had become excessively complex and opaque — and global reform initiatives to improve transparency and incentive arrangements for this financing technique.

In APRA’s view, the prudential framework for securitisation needs, as much as possible, to be clear and simple for stakeholders to understand. APRA’s proposed approach to securitisation includes the following features:

  • a set of key principles that apply to securitisation, rather than an expanded set of prudential requirements;
  • a simple two credit class structure, which reduces the likelihood of opaque risk transfer and enhances benefits for system stability;
  • a simple ‘skin-in-the-game’ requirement to mitigate agency risks;
  • explicit recognition of funding-only securitisation, with a simple but robust prudential regime that also allows for revolving securitisations or master trusts;
  • simpler requirements for capital relief, matching risk to the amount of regulatory capital held;
  • better integration of securitisation with the ADI liquidity regime; and
  • clarification of the treatment of warehouses and similar structures.

The securitisation market in Australia has been an important contributor to competition, efficiency and contestability in the ADI industry. Provided securitisations are well-structured, transparent and based on quality assets, these benefits outweigh any additional risks associated with this financing technique. APRA’s proposed reform of the prudential framework for securitisation is intended to assist in the further recovery of this market in Australia.

APRA Chairman Dr John Laker said: ‘Securitisation has an important role to play in the Australian economy, and a simplified and streamlined prudential framework will better support this market, while strengthening risk management by ADIs involved in securitisation.’

APRA invites written submissions on the proposals in this discussion paper by 31 July 2014.

Following consideration of submissions received, APRA intends to release a second consultation package in 2015 that will include APRA’s response to submissions as well as a draft prudential standard, prudential practice guide and associated reporting requirements.

APRA does not intend to finalise any reforms to its prudential framework for securitisation until, at least, the completion of the Financial System Inquiry now underway. APRA will also have regard to proposed revisions to the securitisation framework of the Basel Committee on Banking Supervision, which have been out for consultation since December 2013.

The discussion paper can be found on APRA’s website.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.