Banking (prudential standard) determination No. 1 of 2011
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority
Banking Act 1959 subsection 11AF(3)
Acts Interpretation Act 1901 subsection 33(3)
Under subsection 11AF(3) of the Banking Act 1959 (the Act) APRA may, in writing, vary or revoke a prudential standard. Under subsection 33(3) of the Acts Interpretation Act 1901, where an Act confers a power to make, grant or issue any instrument (including rules, regulations or by‑laws) the power shall, unless the contrary intention appears, be construed as including a power exercisable in the like manner and subject to the like conditions (if any) to repeal, rescind, revoke, amend, or vary any such instrument.
Banking (prudential standard) determination No. 1 of 2011 (the instrument) varies Prudential Standard APS 210 Liquidity (APS 210), Prudential Standard APS 110 Capital Adequacy (APS 110) and Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111) as set out in the Schedule attached to the instrument.
- Background
A number of developments in the securitisation market have posed challenges to the ability of regional and small ADIs (ADIs) to efficiently securitise their residential mortgages, which has adversely affected their ability to compete in the Australian residential mortgage market.
In the above context, the -ADIs have raised as an issue APRA’s prudential requirements where an originating ADI holds the most subordinated tranche(s) of notes (even if rated) with no externally provided credit enhancement other than lenders mortgage insurance. APRA would not consider such a scenario as ‘significant credit risk transfer’ and therefore would expect ADIs to hold regulatory capital for those securitised assets as though they were on the ADI’s balance sheet.
2. Purpose of the instrument
The instrument gives effect to an alternative capital treatment for these tranche(s) (that is, the most subordinated tranche(s) of notes (even if rated) with no externally provided credit enhancement other than lenders mortgage insurance). Instead of holding capital for the subordinated tranche(s) as if they were on the ADI’s balance sheet, the alternative proposal will be to deduct from Tier 1 capital all subordinated tranche(s) held. The amount deducted can be reduced if notes are sold to third parties and credit risk transfer occurs. Furthermore, the amount to be deducted will be capped to the amount that would need to be held if the mortgage pool was on balance sheet (the current treatment). By capping the alternative capital treatment, this will not worsen the capital outcome from that required by the current requirement and will create a strong incentive for the ADIs to sell the subordinated tranche(s) as quickly as possible.
3. Operation of the instrument
This instrument takes effect on 1 March 2011 or the date of registration on Federal Register of Legislative Instruments (FRLI)[1] whichever last occurs.
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4. Consultation
No formal consultation on this amendment was undertaken. APRA believes that the alternative treatment will be beneficial to ADIs and their ability to compete in difficult market conditions. ADIs will be no worse off than under the current requirements, as the alternative treatment will be capped at the amount that ADIs would otherwise need to hold under the current capital treatment. The alternative treatment, however, is designed to enable ADIs to hold subordinated tranches in difficult market conditions with the incentive to sell the subordinated tranches as quickly as possible in order to reduce the amount of securitised assets that are to be deducted from Tier 1 capital.
The OBPR has agreed (OBPR ID: 2011/12286) that the proposed changes are of a minor nature and no further analysis (in the form of a Regulation Impact Statement) is required.
[1] Established under the Legislative Instruments Act 2003