New securitisation guidelines from APRA may benefit competition, provide improved prudential outcomes, provide efficiency offer a stable long term funding source.
In Australia, securitisation has typically been a material share of funding for a number of ADIs. Smaller ADIs e.g. domestic banks (other than the major banks), credit unions and building societies (CUBS), in particular, use securitisation to generate a greater proportion of funds than larger ADIs.
Securitisation of loans and other assets 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.
APRA has been working to update its regulatory framework for securitisation to incorporate the most recent internationally agreed regulatory reforms, as well as to reflect the lessons of the global financial crisis and provide a more sustainable basis for the securitisation market going forward.
APRA has now released details of its changes to the securitisation guidlines for Australian ADI’s. The revised APS 120 will take effect from 1 January 2018.
APRA’s reforms to apply simpler approaches to assigning regulatory capital for securitisation exposures will reduce the differential treatment of ADIs using advanced and standardised approaches to regulatory capital for credit risk, which may benefit competition.
The main amendments to the draft revised APS 120 and APRA’s clarifications relate to:
- reducing the scope of exposures where a Common Equity Tier 1 Capital (CET1) deduction is required;
- including more flexible arrangements in regard to funding-only securitisations; and
- additional flexibility for ADIs making use of warehouse arrangements that may qualify for regulatory capital relief.
APRA also decided not to modify its proposals in several areas, after considering industry submissions. APRA proposals that remain unchanged include:
- removal of the advanced modelling approaches to calculating regulatory capital requirements;
- treatment of securitisations of revolving credit facilities, ABCP, and synthetic securitisations; and
- the treatment of shared collateral.
The final revised APS 120 also reflects APRA’s implementation of the Basel Committee’s revised securitisation framework (Basel III securitisation framework), with appropriate Australian adjustments.
To better reflect underlying risk, and to address the lessons learned from the global financial crisis, APRA’s initiatives and the Basel III securitisation reforms include more conservative regulatory capital requirements for some types of securitisation exposures. However, the underlying operational requirements for securitisation are either unchanged or have been simplified.
In responding to submissions on the revised APS 120, APRA has sought to reach an appropriate balance between the objectives of financial safety and efficiency, competition, contestability and competitive neutrality, whilst promoting financial stability. APRA considers the final revised APS 120 will, on balance, provide improved prudential outcomes and provide efficiency and competitive benefits to ADIs.
The explicit recognition of securitisation for funding purposes in the prudential standard is expected to improve the ability of ADIs to secure long-term, stable wholesale funding.
APRA’s reforms to apply simpler approaches to assigning regulatory capital for securitisation exposures will reduce the differential treatment of ADIs using advanced and standardised approaches to regulatory capital for credit risk, which may benefit competition. Further, APRA’s clarification of the regulatory capital requirements for warehouse arrangements may also assist smaller ADIs in improving access to term wholesale funding, without creating undue prudential risk.
The revised APS 120 will take effect from 1 January 2018. APRA is currently consulting on the draft revised APG 120. In the coming months, APRA will separately consult on revised reporting requirements for securitisation that would take effect at the same time as the revised prudential standard and prudential practice guide.
