APRA Issues Further Guidance on Application of Securitization Standard
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization. The FAQs address the repurchase of underlying exposures from a securitization, transfer of assets between securitizations, and credit enhancements. The FAQs are relevant for originating authorized deposit-taking institutions and authorized deposit-taking institutions that hold securitization exposures.
APS 120 is intended to ensure that an authorized deposit-taking institution adopts prudent practices to manage the risks associated with securitization and to ensure sufficient regulatory capital is held against the associated credit risk. The standard stipulates that an institution must have a risk management framework covering its involvement in a securitization, must ensure disclosure of the nature and limitations of its obligations arising from its involvement in a securitization, and must calculate regulatory capital for credit risk against its securitization exposures. An institution is required to apply the capital adequacy requirements set out in this APS 120 to securitization exposures held in its banking book. However, securitization exposures held in the trading book are subject to APS 116, the prudential standard on capital adequacy for market risk, except that securitization exposures held in the trading book must be deducted from the Common Equity Tier 1 Capital if they are required by this prudential standard to be deducted if held in the banking book. APS 120 commenced on January 01, 2018 and applies to securitizations, whether traditional, synthetic, or containing features common to both.
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Keywords: Asia Pacific, Australia, Banking, APS 120, FAQ, Securitization, Regulatory Capital, Credit Risk, Securitization Framework, Basel, APRA
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