Banking (prudential standard) determination No. 1 of 2012
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Banking Act 1959, section 11AF
Under subsection 11AF(1) of the Banking Act 1959 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised NOHCs).
On 20 July 2012, APRA made Banking (prudential standard) determination No. 1 of 2012 under subsection 11AF(1) of the Act (the instrument).
The instrument will take effect on 1 August 2012.
- Background
The preference provisions in the Act have impeded ADIs issuing secured debt, such as covered bonds. These provisions have historically ensured that depositors in Australia have the first claim (that is, ahead of all other creditors, including secured creditors) on all of an ADI’s Australian assets. However, in October 2008, the Government introduced a new protective framework for depositors called the Financial Claims Scheme (FCS) which ensures that 99 per cent of Australian deposit accounts are protected in full.
The Banking Amendment (Covered Bonds) Act 2011 amended the Act to permit ADIs to issue covered bonds. Covered bonds diversify an ADI’s funding base, offer a potentially cheaper form of wholesale funding for ADIs and may provide the opportunity to raise funds with longer maturity. Also, covered bonds are typically structured with repayment of the principal at the maturity date and are potentially more attractive to investors such as superannuation funds seeking more predictable returns relative to some securitisation products.
The amendments established that prudential standards issued by APRA could provide for any matter relating to covered bonds.
2. Purpose and operation of the instrument
The purpose of the instrument is to make Prudential Standard APS 121 Covered Bonds (APS 121), which sets out prudential requirements for the issuing of covered bonds by ADIs. The key requirements of APS 121 are that an authorised deposit-taking institution must:
- adopt policies and procedures to manage risks relating to its issuance of covered bonds; and
- apply an appropriate capital treatment to exposures associated with covered bond issuance.
Other, specific requirements relate to:
- requiring that contracts clearly specify the rights and obligations of the ADI and covered bondholders, including in relation to collateral securing the covered bonds;
- ensuring the integrity of the eight per cent of assets in Australia limit on assets in cover pools contained in section 28 of the Act by requiring that such assets are clearly identifiable and that other assets remain subject to the depositor preference provision in subsection 13A(3) of the Act.
3. Consultation
In November 2011, APRA released for public consultation a discussion paper, Covered bonds and securitisation matters and, draft prudential standard.[1] APRA received nine written submissions in response to this consultation package and held discussions with a variety of industry participants. Submissions focussed on issues including: asset identification, capital and the requirement in the draft APS 121 for asset registers. Other topics raised included the capital treatment of assets outside cover pools, cross default, disclosure and collateral securing derivatives.
APRA released a Response to Submissions Covered bonds and securitisation matters (Response) on 12 July 2012.[2] In the Response APRA noted the issues raised in submissions and that it had modified draft APS 121 in response to submissions. These modifications included:
- a requirement for ADIs to manage their covered bond programs prudently having regard to what is reasonably necessary for the efficient operation of the covered bond program;
- making APRA’s original proposal that ADIs maintain an asset register of assets in a cover pool for covered bonds optional, but not permitting an ADI to apply a concessional risk-weight to an asset held by the SPV when calculating its capital requirements;
- adopting the Corporations Act 2001 provisions for the sale of property by a controller for the sale of assets in a cover pool where it is necessary to sell assets; and
- inserting a requirement that ADIs identify all instances of double‑counting and exclude them from their calculation of assets in Australia for the purposes of calculating the eight per cent limit of assets in cover pools in section 28 of the Banking Act.
4. Regulation Impact Statement
The Office of Best Practice Regulation has advised that a Regulation Impact Statement is not required as the purpose of APS 121 is primarily mechanical in nature and gives effect to the legal framework for issuing covered bonds established by the Banking Amendment (Covered Bonds) Act 2011.
5. Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
The legislative instrument the subject of this explanatory statement does not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011. Accordingly, in APRA’s assessment, this legislative instrument is compatible with human rights.
[1] http://www.apra.gov.au/adi/Pages/Covered-bonds-and-securitisation-matters-Nov-2011.aspx
[2] http://www.apra.gov.au/adi/Pages/Covered-bonds-and-securitisation-matters-Nov-2011.aspx