At the 2012 Annual Securitisation Conference held in Sydney this week, insight into the current thinking of the Australian Prudential Regulation Authority (APRA) for reforms to its prudential standards on securitisation applying to Australian authorised deposit-taking institutions was outlined by Charles Littrell, Executive General Manager for Policy, Research and Statistics.

APRA has highlighted three core themes which it will be focussing on as part of the  reforms, namely:

  • explicitly catering for funding-only securitisation, subject to prudential limits
  • greatly simplifying the overall prudential regime, and
  • addressing the lessons learned about securitisation during the GFC, namely, agency risk, liquidity risk and business model risk.

While APRA intends to formally consult the industry by issuing a discussion paper, its approach to funding-only securitisations would involve a structure that is restricted to the issuance of two tranches of debt instrument, a senior “A tranche” and a subordinated “B tranche”. It is expected that the A tranche would be AAA rated and, for a typical home loan securitisation, comprise approximately 90 per cent of the note issuance.  The B tranche, which would have a lower rating or be unrated, would be held in its entirety by the originating ADI.  At the same time, APRA will develop bespoke “funding-only liquidity” requirements aimed at limiting the extent to which an ADI can use its balance sheet to provide liquidity support and better aligning asset and liability tenors.

Capital-relief securitisations will of course remain a central feature of the prudential framework, but with the critical difference that originating ADI’s should not retain any of the subordinated or “B tranche”, other than to the extent necessary to comply with any “skin in the game” requirements which will also be the subject of the reforms.  To the extent that a securitisation is for dual purposes of capital relief as well as funding, APRA’s view is that the subordinated/B tranche should be held by investors who are not ADIs and who are capable of doing their own credit analysis without needing to rely on a credit rating.  APRA intends to back its view up with the imposition on an ADI of a 100% deduction from its equity where it has any holding of B tranche debt instruments which have been issued by another ADI.

APRA’s discussion paper will also invite submissions and comment on:

  • the phasing out and/or abolition of synthetic securitisations in Australia by ADIs
  • the imposition of an equity deduction for ADIs holding complicated subordinated securitisation instruments or re-securitisation instruments, and
  • any impacts of APRA’s proposed reform proposals which might facilitate or hinder the development of master trust securitisation programmes in Australia.

By only allowing Australian ADIs to participate in securitisations which are simply structured to comprise only two tranches of debt instruments – a senior “A” tranche and a subordinated “B” tranche (in which all the material credit risks are concentrated) – APRA believes that Australian ADIs will be engaged in arrangements that result in safe and simple tranches of senior debt instruments being issued to domestic and global investors.