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    APRA to Scrutinize Securitization Practices of Banks

    December 07, 2020

    APRA has announced a review of securitization practices of authorized deposit-taking institutions. This is because APRA has recently identified that some authorized deposit-taking institutions repurchased residential mortgage loans that were subject to repayment deferral from their securitizations. APRA believes that this represents implicit support, which is inconsistent with APS 120, the prudential standard on securitization. APRA has required the institutions that it considers to have provided implicit support to publicly disclose their repurchases as part of upcoming Pillar 3 reporting requirements. Other issues have also been identified in relation to the compliance with APS 120 within these institutions.

    APRA believes it is necessary to conduct a program of securitization thematic reviews, which will continue into 2021. Depending on the findings, the reviews may be expanded further. Identification of noncompliance with APS 120 may result in the authorized deposit-taking institution being required to publicly disclose its noncompliance and/or a requirement to hold additional regulatory capital. Additional consequences for non-compliance with APS 120 may also include the need for engagement of an APRA-approved independent third-party to review the authorized deposit-taking institution’s compliance with the prudential standard and for the APRA pre-approval of further securitization issuance. In advance of these APRA reviews, APRA recommends authorized deposit-taking institutions to ensure that they comply with this letter and the intent of APS 120 and to ensure that controls and procedures are in place to maintain compliance. This applies to the documentation and ongoing management of the securitization. Deficiencies identified by APRA as part of its thematic reviews include:

    • Little or no procedures or controls to challenge or provide oversight of ongoing securitization operations, such as approving repurchases
    • Requirements for authorized deposit-taking institutions to repurchase loans from their securitizations under certain circumstances, in breach of APS 120 paragraph 18
    • Considering capitalizing interest to be a further advance and insufficiently considering the provision of implicit support and the guidance in Prudential Practice Guide APG 120 on securitization for the purposes of APS 120, Attachment A, paragraph 6.

    Self-identification and timely reporting by authorized deposit-taking institutions to APRA of non-compliance will be favorably considered by APRA when determining the appropriate actions. APS 120 requires authorized deposit-taking institutions to be clearly separate from their securitizations and to permanently transfer credit risk to the securitization investors. APS 120 only allows authorized deposit-taking institutions to repurchase mortgages from their securitizations under limited circumstances and if the borrower is in good standing. The intent of APS 120 is that mortgages are not repurchased by authorized deposit-taking institutions 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 securitization. 

     

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    Keywords: Asia Pacific, Australia, Banking, Securitization, Residential Mortgage Loans, Credit Loans, Credit Risk, Regulatory Capital, Securitization Framework, APS 120, Thematic Review, Pillar 3, Disclosures, APG 120, APRA

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