Banks will be expected to make vigorous use of mortgage-backed bonds as a long-term funding option to meet liquidity targets, a senior officer of the Australian Prudential Regulation Authority made clear yesterday.Charles Littrell, executive general manager for policy at APRA, told the Australian Securitisation Forum conference that "for banks establishing a Committed Liquidity Facility with the RBA, the 'all reasonable steps' test will apply to securitisation in the same way this expectation applies to banks issuing unsecured term liabilities." "That is, banks with substantial home loan pools are in a good position to issue funding only, or for that matter capital relief, securitisations, and they will be expected to do so in order to further increase the tenor of their wholesale liabilities." Littrell walked through the changes to APRA's policies on securitisation that will promote what he termed "funding only" securitisations. Littrell told the forum: "Our aspiration for securitisation under the reformed prudential arrangements is that Australia will end up with a large and active funding-only market." "This will materially assist Australia's banking sector to correct its current imbalance between long-term, retail domestic assets, and a funding side overly reliant upon the kindness of strangers." "By integrating the liquidity side of APS 120 with APRA's prudential liquidity requirements, we will better insulate Australia from future global or domestic funding market failures. "We are hopeful that the new arrangements also allow a substantial market in capital relief securitisations, under arrangements that much more explicitly transfer credit risk from the originator to other investors. It remains to be seen how this market will develop. 'In any event, we consider that these arrangements will maintain robust incentives for originators to maintain reasonable lending quality. "Finally, as with international perceptions of the Australian banking system more generally, we want international investors to consider the Australian securitisation market a place where they can easily make safe and simple investments, and are most unlikely to be subject to the undesirable practices revealed elsewhere in the world.  "Some future panic might better distinguish between quality in national securitisation markets. Neither APRA nor anybody else can guarantee that the Australian securitisation market won't close. The arrangements we are proposing, however, should go some way towards ensuring that we are the market that closes last, and re-opens first."