APRA warns on synthetic securitisation

The Australian Prudential Regulation Authority (APRA) has sent a strong signal that it is likely to oppose the use of synthetic securitisation by banks.

The regulator's position on the issue has been revealed by APRA's executive general manager for policy and research, Charles Littrell, who said that in a systemic stability sense, "APRA is increasingly unconvinced that allowing synthetic securitisation is a good strategy for Australia".

"Accordingly, we are likely to commence consultation on the basis that synthetic securitisations will no longer produce capital benefits," he told a securitisation forum in Sydney.

Littrell said that, similarly, current arrangements allowed for remarkably complicated and opaque resecuritisation instruments to be originated, traded, and held by Australian Deposit-taking Institutions (ADIs), often at low risk weights.

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"It is not evident that these instruments have any practical use, and painfully evident that these instruments have been acquired by investors, including Australian investors, who were unable to understand the risks inherent in them," he said. 

"Accordingly, APRA's likely position for consultation is that ADIs are expected not to hold subordinated securitisation instruments, or any resecuritisation instruments, and any such holdings will attract an equity deduction."

Littrell warned that it would be up to industry to argue the case for any more liberal treatment.

On the question of master trusts, Littrell said the regulator had observed the level of discussion on master trusts over the years and would be interested to hear any views on how APRA's proposed reforms might facilitate or retard the development of master trusts.