APRA to Scrutinize Securitization Practices of Banks
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.
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
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous ArticleIAIS Consults on Principles for Assessment of Aggregation Method
FINMA Approves Merger of Credit Suisse and UBS
The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
MFSA Sets Out Supervisory Priorities, Issues Reporting Updates
The Malta Financial Services Authority (MFSA) outlined its supervisory priorities for 2023
German Regulators Issue Multiple Reporting Updates for Banks
Deutsche Bundesbank published the nationally deactivated validation rules for the German Commercial Code (HGB) users on the taxonomy 3.2, which became valid from December 31, 2022
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.