The Australian Prudential Regulation Authority (APRA) has signalled it will be taking a closer look at securitisation arrangements in the wake of several recent supervisory investigations.
APRA’s executive general manager, Charles Littrell used a speech in Sydney this week to suggest that the supervisory investigations indicate that we need to take a close look at some business practices which have evolved over the years.”
Littrell said that APRA had observed practices which might require modification including distinguishing for investors the difference between lending to a securitised vehicle and deposition money in an APRA-regulated institution.
“Some market practice, such as fine print disclosure and use of common names, may tend to blur this necessary distinction,” he said. “The original disclosure requirements developed by the Reserve Bank of Australia in the early 1990s have been subject to some ‘drift’ in practice.
“As is common with such drift, at some point the supervisor steps in with new rules, re-establishing an appropriate distance between originator and vehicle, and then the process starts all over again,” Littrell said.
He said that in addition to disclosure and of more importance was that some contractual arrangements between asset originators and securitisation vehicles seemed to tread on the spirit if not the letter of APRA’s clean sale requirements.
“It is sometimes difficult, for example, to distinguish between a liquidity line of credit extended to the vehicle by the originator, and a more substantial quasi-guarantee,” Littrell said. “We have also observed some basis swaps that may create market risk exposure which is not covered by regulatory capital.”
He said the regulatory was also observing some operational practices in the origination and transfer of loans to securitisation vehicles “which are less than satisfying from a prudential viewpoint”.
