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APRA releases final revised standard on securitisation

Thursday 10 November 2016


The Australian Prudential Regulation Authority (APRA) has today released the final revised Prudential Standard APS 120 Securitisation (APS 120) which is accompanied by the Response to Submissions Paper Revisions to the prudential framework for securitisation November 2016. APRA is also releasing a draft revised Prudential Practice Guide APG 120 Securitisation (APG 120).

In addition to strengthening banking sector resilience, APRA’s main reform objectives for the securitisation framework are to facilitate a more robust securitisation market by providing:

  • more flexibility for authorised deposit-taking institutions (ADIs) in their funding programs;
  • a simpler set of operational requirements for the use of securitisation; and
  • simpler and more transparent approaches to calculating regulatory capital requirements that appropriately reflect risk.

The final revised APS 120 also reflects APRA’s implementation of the Basel III securitisation framework.

APRA Chairman Wayne Byres noted that: ‘APRA’s reforms introduce a simpler and more transparent framework, taking into account global reform initiatives and the lessons learned from the global financial crisis, while also providing more flexible arrangements for ADIs to use securitisation for funding purposes.’

The final revised APS 120 will take effect from 1 January 2018. APRA invites written submissions on the draft revised APG 120 by 20 December 2016. In the coming months, APRA will separately consult on revised reporting requirements for securitisation which would take effect at the same time as the revised prudential standard.

You can view the Prudential Standard APS 120 Securitisation, and the Response to Submissions - counterparty credit risk for ADIs April 2018 on the APRA website. 


Q: What is securitisation and why is it important to ADIs?

A: Securitisation involves selling a ‘pool’ of assets (typically loans) to a special purpose vehicle, which then obtains funding for these assets from the capital markets.

Securitisation can be an important and cost-effective mechanism by which an ADI can obtain funding for its business. Australian ADIs have used securitisation successfully for many years to diversify their funding base and make efficient use of capital.

Q: Why has APRA undertaken revisions to its securitisation framework?

A: One of the lessons of the global financial crisis was that securitisation had become excessively complex and opaque, while prudential regulation of securitisation had become similarly complex. Since 2012, APRA has been working to update its regulatory framework for securitisation to incorporate the Basel Committee’s recent regulatory reforms for securitisation, as well to reflect the lessons of the global financial crisis and provide a more sustainable basis for the Australian securitisation market in the future.

Q: How has APRA introduced more flexibility for ADIs in their funding arrangements?

A: Previously, an ADI that entered into a securitisation arrangement needed to meet the requirements necessary to reduce their regulatory capital requirements. Under the new framework, an ADI that wants to raise funding without seeking capital relief can do so by meeting a simpler set of requirements. Since the global financial crisis, some ADIs have preferred to place a greater emphasis on securitisation as a source of funding and have been less concerned with securitisation for regulatory capital relief. APRA has therefore revised the securitisation framework to explicitly recognise securitisations used only for funding purposes.

Q: What are the benefits in introducing more flexibility for ADIs in their funding arrangements?

A: A key feature of the new regime - providing more flexible arrangements for funding with securitisation - is particularly attractive to a range of ADIs due to investor interest and lower hedging costs. It also supports other regulatory initiatives to encourage ADIs to pursue more stable sources of funding.

Q: Why are capital requirements increasing for some types of securitisation exposures?

A: APRA’s initiatives and the Basel III securitisation reforms include more conservative regulatory capital requirements for some types of securitisation exposures. The global financial crisis highlighted that the current low risk weights on some highly-rated securitisation exposures and some complex (riskier) securitisation were insufficient and additional regulatory capital was necessary.

Q: How are warehouse arrangements treated under the new prudential framework?

A: Warehouse arrangements assist small ADIs in improving access to term wholesale funding and therefore are important to competition. APRA has clarified in the draft revised APG 120 that warehouses may still qualify for regulatory capital relief subject to certain conditions. APRA believes that this will facilitate the continued use of warehouses for regulatory capital relief purposes for many smaller ADIs, while not allowing such arrangements to be used to inappropriately reduce capital requirements within the banking system.

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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 $6.5 trillion in assets for Australian depositors, policyholders and superannuation fund members.