APRA Orders Banks to Correct Deficient Securitisation Practices

APRA has found a number of banks not in compliance with its prudential standard on securitisation. A review now underway will continue into 2021.

APRA (Australian Prudential Regulation Authority) has commenced a review of securitisation practices at banks amid findings of noncompliance with regulatory requirements.

The regulator has recently identified that some banks repurchased residential mortgage loans that were subject to repayment deferral from their securitisations. This represents “implicit support”, which is inconsistent with the prudential standard on securitisation (APS 120)

APS 120 requires banks to be clearly separate from their securitisations and to permanently transfer credit risk to the securitisation investors. It only allows banks to repurchase mortgages from their securitisations under limited pre-defined circumstances, and if the borrower is in good standing.

“The intent of APS 120 is that mortgages are not repurchased by ADIs if the borrower is in hardship or the loan is of lower quality, as this would undermine the principle of a clear transfer of credit risk that is at the heart of the regulatory treatment of securitisation,” APRA executive director Therese McCarthy Hockey said in a letter to banks.

APRA has required the banks that it considers to have provided implicit support in this manner to publicly disclose their repurchases as part of their upcoming Pillar 3 reporting requirements. The banks will also be required to undergo a third party review of their APS 120 compliance and mitigate the findings prior to any further securitisation issuance.

The regulator has also identified other issues in relation to APS 120 compliance, including deficiencies in internal controls and procedures, which hinder oversight of ongoing securitisation operations. “Based on these findings and engagement with industry stakeholders, APRA believes it is necessary to conduct a program of securitisation thematic reviews,” the letter says.

The reviews now underway will continue into 2021, and could be expanded further depending on the findings.

Banks found to be noncompliant with APS 120 may be required to publicly disclose their non-compliance,  hold additional regulatory capital, undergo a third party review of their compliance, and seek APRA’s pre-approval for any further securitisation issuance.

Ahead of the reviews, APRA asks banks ensure they comply with the letter and intent of APS 120, and to ensure their controls and procedures are in place to maintain compliance, including in relation to documentation and ongoing management of securitisations.

“Self-identification and timely reporting by ADIs to APRA of non-compliance will be favourably considered by APRA when determining the appropriate actions,” the letter says.

The full letter is available here.

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