Federal Register of Legislation - Australian Government

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Standards/Prudential (Banking & Insurance) as made
This instrument determines Prudential Standard APS 120 Securitisation.
Administered by: Treasury
Registered 14 Jun 2017
Tabling HistoryDate
Tabled HR15-Jun-2017
Tabled Senate19-Jun-2017

Banking (prudential standard) determinations Nos. 2 and 3 of 2017

REPLACEMENT 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). Under subsection 11AF(3) of the Act, APRA may, in writing, vary or revoke a prudential standard.

On 8 June 2017, APRA made the following determinations (the instruments):

(1)     Banking (prudential standard) determination No. 2 of 2017 (the instrument), which revokes Prudential Standard APS 001 Definitions made under Banking (prudential standard) determination No. 3 of 2014 and determines a new Prudential Standard APS 001 Definitions (APS 001);

(2)     Banking (prudential standard) determination No. 3 of 2017 (the instrument), which revokes Prudential Standard APS 120 Securitisation made under Banking (prudential standard) determination No. 7 of 2014, and determines a new APS 120.

The instruments commence on 1 January 2018.

1.      Background

APRA’s mandate is to ensure the safety and soundness of prudentially regulated financial institutions so that they can meet their financial promises to depositors, policyholders and fund members within a stable, efficient and competitive financial system.

APRA carries out this mandate through a multi-layered prudential framework that encompasses licensing and supervision of institutions. In the case of the banking industry, APRA is empowered under the Act to issue legally binding prudential standards that set out specific prudential requirements with which ADIs must comply. These standards are supported by prudential practice guides (PPGs), which clarify APRA’s expectations with regard to prudential requirements.

APRA regularly reviews its regulatory regime and amends its prudential requirements as a result of a number of factors including:

·                international developments;

·                changes in financial market conditions or changes in risk management practices, in response to identified weaknesses in the prudential framework; and

·                to reduce potential negative impacts of emerging industry issues.

 

One of the key components of APRA’s prudential framework is the suite of prudential standards which require ADIs to hold regulatory capital as a buffer against the risks which they undertake (capital standards). These capital standards include Prudential Standard APS 120 Securitisation (APS 120). APRA’s capital standards for ADIs follow closely those set by the Basel Committee on Banking Supervision (Basel Committee).[1] The capital standards set by the Basel Committee was always intended to be subject to ongoing review.

The Basel Committee regularly reports to the Group of Twenty (G20) Leaders, which includes Australia’s Prime Minister, and to the Financial Stability Board (FSB).[2],[3]  Since the global financial crisis (the market disruptions of 2007-2009), G20 Leaders have committed to fully and consistently implement the international framework known as ‘Basel III’. As part of its strategic response to address weaknesses revealed by the global financial crisis, the Basel Committee has undertaken a review of its existing securitisation framework (Basel II securitisation framework).[4] 

One of the main lessons of the global financial crisis was that securitisation structures had become excessively complex and opaque, and that prudential regulation of securitisation had become similarly complex. Weaknesses in the Basel II securitisation framework revealed by the global financial crisis included relatively low capital requirements on some highly rated securitisation exposures.

In December 2014, the Basel Committee released its updated securitisation framework (Basel III securitisation framework).[5] 

In addition to the need to update APS 120 to reflect the Basel III securitisation framework, ADIs have asked APRA to update the prudential standard to allow for some flexibility. Securitisation was originally conceived as a tool to enable ADIs to achieve both funding and capital benefits. Industry practice has evolved to create a class of ADIs which is only interested in funding, not capital benefits. However, APS 120 does not explicitly recognise securitisation for funding only purposes.

Other amendments to prudential standards are necessary to support the implementation of the new APS 120. These consequential changes to prudential standards include minor cross-referencing changes that flow from the new APS 120.

2.      Purpose and operation of the instruments

Banking (prudential standard) determination No 2 of 2017

The purpose of the instrument is to revoke APS 001 and to replace it with a new version of APS 001.

APS 001 incorporates common definitions used in ADI prudential standards into a single prudential standard. Generally, only definitions that are unique to a particular prudential standard will be retained in that prudential standard; otherwise, definitions common to two or more prudential standards have been consolidated in APS 001.

The instrument makes changes to APS 001 to insert a new definition of securitisation to align with the definition of securitisation that is used in the new APS 120. Changes are also made to APS 001 to make it clear that the securitisation special purpose vehicle (SPV) is excluded from the Level 2 group where the originating ADI meets the operational requirements for regulatory capital relief for the securitisation, consistent with the new APS 120.

Banking (prudential standard) determination No. 3 of 2017

 

The purpose of the instrument is to revoke APS 120 and to replace it with a new version of APS 120.

 

APS 120 requires ADIs to adopt prudent practices in managing the risks associated with securitisation and to ensure that sufficient regulatory capital is held against the associated credit risk.

 

The main changes to APS 120 are:

·                to provide more flexibility for ADIs in their funding arrangements;

·                a simpler set of requirements for ADIs seeking regulatory capital benefits; and

·                simpler approaches to calculating regulatory capital requirements.

Changes to APS 120 include recent internationally agreed regulatory reforms (the Basel III securitisation framework) with appropriate Australian adjustments and introduces more conservative regulatory capital requirements for some types of securitisation exposures to better reflect underlying risk, and to address the lessons learned from the global financial crisis.

APS 001 and APS 120 incorporate by reference certain provisions of Acts and Prudential Standards.  All of these references are references to the provisions as in force from time to time, and are available on the Federal Register of Legislation at www.legislation.gov.au. APS 001 incorporates by reference a definition in the Framework for Assurance Engagements issued pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 by the Auditing and Assurance Standards Board, as amended from time to time. That document may be accessed at: http://www.auasb.gov.au/Pronouncements/Framework-for-Assurance-engagements.aspx

3.      Consultation

Information concerning consultation on the making of the instrument is contained in the document evidencing the independent review of the revision of the securitisation framework, which has been lodged as supporting material.[6]

APRA has undertaken two rounds of public consultation in revising its securitisation framework.

APRA first consulted on initiatives to simplify its prudential framework for securitisation in April 2014 with the release of the Discussion Paper ‘Simplifying the prudential approach to securitisation’ (first consultation paper).[7] 

This first consultation paper was an exploratory paper. APRA sought feedback on its proposals in its first consultation paper, noting that it intended not to finalise any reforms to its prudential framework for securitisation until, at least, the completion of the Government’s Financial System Inquiry and the finalisation of revisions to the Basel Committee’s Basel II securitisation framework.[8]

APRA received eighteen submissions in response to its first consultation paper.

In November 2015, APRA released a second consultation paper which included APRA’s response to submissions to its first consultation paper and its proposed implementation of the Basel Committee’s Basel III securitisation framework. The second consultation paper also outlined proposed consequential changes to other prudential standards as a result of the proposed revisions to APS 120. APRA also released a draft revised APS 120 at this time. APRA amended its proposals in a number of areas following consideration of the issues raised in submissions. Refer to the second consultation paper Chapter 2 Response to submissions – ‘Simplifying the prudential approach to securitisation’.[9]

APRA sought feedback on its proposals in its second consultation paper, including aspects previously consulted on. APRA received sixteen submissions to its second consultation paper. In the final version of APS 120, APRA has clarified or amended its proposals in a number of areas following consideration of the issues raised in submissions. 

While the final version of APS 120 introduces more conservative regulatory capital requirements for some types of securitisation exposures, more flexibility in funding arrangements is something the industry has been pressing APRA on for a number of years, and this should permit greater use of securitisation as a low-risk and low-cost funding tool for all ADIs.

4.   Regulation Impact Statement

APRA undertook an independent review of revisions to the securitisation framework and have followed a process and analysis equivalent to a Regulatory Impact Statement (RIS). Regulatory costs associated with the revisions to the securitisation framework have been agreed with the Office of Best Practice Regulation.

The document evidencing the independent review has been lodged as supporting material.

5.   Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

A Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment A to this Explanatory Statement.


ATTACHMENT A

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Banking (prudential standard) determinations Nos. 2 and 3 of 2017

These Legislative Instruments are compatible with the human rights and freedoms recognised or declared in the international instrument listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act)

Overview of the Legislative Instruments

The purpose of the instruments is to:

(1)     revoke Prudential Standard APS 001 Definitions (APS 001) determined by APRA in 2014 and replace it with a new Prudential Standard APS 001 Definitions (new APS 001). New APS 001 reflects a new definition of securitisation to align with the definition of securitisation that is used in the new APS 120. New APS 001 also reflects that the securitisation SPV is excluded from the Level 2 group where the originating ADI meets the operational requirements for regulatory capital relief for the securitisation, consistent with new APS 120. 

(2)     revoke Prudential Standard APS 120 Securitisation (APS 120) determined by APRA in 2014 and replace it with a new Prudential Standard APS 120 Securitisation (new APS 120). New APS 120 reflects simplification of the prudential framework for securitisation and implementation of the Basel III securitisation framework, with appropriate Australian adjustments. 

Human rights implications

APRA has assessed the instruments and is of the view that they do not engage any of the applicable rights or freedoms recognised or declared in the international instruments listed in section 3 of the HRPS Act. Accordingly, in APRA’s assessment, the instruments are compatible with human rights.

Conclusion

The instruments are compatible with human rights as they do not raise any human rights issues.

 



[1]           The Basel Committee, of which Australia is a member, is the primary global standard-setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability.

[2]           The G20 is the premier international forum for cooperation on global economic governance.

[3]           The FSB is an international body that monitors and makes recommendations about the global financial system.

[4]           Basel II securitisation framework: Basel II – International Convergence of Capital Measurement and Capital Standards: A Revised Framework – Comprehensive version, June 2006 is available at: http://www.bis.org/publ/bcbs128.htm and Basel II.5 – Enhancements to the Basel II framework, July 2009 is available at: http://www.bis.org/publ/bcbs157.htm

[5]           The Basel Committee’s Basel III document ‘Revisions to the Securitisation Framework’, December 2014 is available at: http://www.bis.org/bcbs/publ/d303.pdf

[6]           APRA has undertaken an independent review of the reforms to the securitisation framework.  The independent review is to satisfy a similar process to that required for a Regulatory Impact Statement (RIS) as set out in the Australian Government Guide to Regulation (the Guide).

[7]           The first consultation paper is available at: http://www.apra.gov.au/adi/Documents/securitisation-discussion-paper-april-2014.pdf

[8]           The final report of the Financial System Inquiry is available at: http://fsi.gov.au/.  The Government’s response to the Financial System Inquiry is available at: http://www.treasury.gov.au/fsi

[9]           The second consultation paper and draft revised APS 120 is available at: http://www.apra.gov.au/adi/PrudentialFramework/Pages/Revisions-to-the-Securitisation-Framework.aspx