The Australian Prudential Regulation Authority has signalled a crackdown on securitisation practices across the banking industry after it found some ADI lenders have been repurchasing securitised mortgages that were subject to repayment holidays.
The regulator has launched several reviews of mortgage securitising in the financial services sector because it believes the repurchasing practices are in breach of its APS 120 standard for securitisation.
“APS 120 requires ADIs to be clearly separate from their securitisations and to permanently (except in limited pre-defined circumstances) transfer credit risk to the securitisation investors,” APRA told ADIs in a letter on Monday.
“APS 120 only allows ADIs to repurchase mortgages from their securitisations under limited circumstances and if the borrower is in good standing.
“The intent of APS 120 is that mortgages are not repurchased by ADIs 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 securitisation.”
APRA did not name the ADI lenders who had repurchased loans subject to repayment pauses, saying only that “some” authorised entities had engaged in the practice.
However, all banks and credit unions found to have breached the standard will be required to disclose the extent of their transgressing in their next Pillar 3 disclosures.
The regulator said it had identified other compliance issues in relation to ADIs who had breached the repurchasing requirements of APS 120.
To tackle the problem, APRA said it has launched a program of thematic reviews of securitisation that will run into next year.
The reviews may be widened in response to the preliminary findings of the thematic reviews.
ADIs that breach the standard could be required to hold additional regulatory capital to account for the credit risks they return to their balance sheets after a securitised mortgage is repurchased.
APRA also warned that ADIs found to be in breach of the standard might be required to obtain regulatory pre-approval before they were permitted to undertake further issues of mortgage backed securities.
The regulator urged all institutions to self-report cases of non-compliance with the securitisation standard, saying such disclosure would be “favourably considered by APRA when determining the appropriate actions”.