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APRA yields on Basel II standard
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APRA yields on Basel II standard

THE PRUDENTIAL regulator says it will be taking a more risk-based approach under the new standard on securitisation released at the end of last year, but will focus more closely on this area in…

THE PRUDENTIAL regulator says it will be taking a more risk-based approach under the new standard on securitisation released at the end of last year, but will focus more closely on this area in onsite visits.

On the release of the final version of the Basel II prudential standards, Heidi Richards, general manager of the Australian Prudential Regulation Authority (APRA), also said despite the 1 January deadline for compliance with the new capital requirements, they were allowing institutions until mid-2008 to assess the new “operational aspects” of the APS 120 securitisation standard.

APS 120 now incorporates the Basel II capital calculations for standardised and internal ratings-based (IRB) approaches to credit risk capital as well as the other Basel II and pre-existing APRA requirements.

Richards said APRA was unique among prudential regulators in its practice of pre-vetting all securitisation deals by financial institutions.

“As you can imagine this is very time consuming for APRA and for ADIs [authorised deposit-taking institutions] wishing to get issues to market. It has had the side benefit of allowing APRA to become quite familiar with all of the structures in the market issued by regulated institutions, and in enforcing a certain amount of consistency,” she told the Australian Securitisation Conference.

“However, in my view transaction-based approvals are not really consistent with being a risk-based prudential supervisor.”

Instead, APRA will obtain regular statistical reporting on securitisation activity, and won’t issue letters confirming compliance with APS 120 unless it has concerns about activity that is not covered by the standard. “APRA supervisors will, however, be covering securitisation more thoroughly in onsite visits, and will review self assessments in that context,” she said.

As the enforcement of the standard will rely more on self-assessment from now on, Richards said they expected to well-developed risk management and compliance policies and procedures for securitisation activities.

“These would be designed to provide assurance that an ADI is complying with its contractual obligations, managing all contracted risks and not providing implicit support to its programs.”

Richards said they had allowed extra time to consider the implications of the operational aspects of the new standard because it had been released so close to the 1 January deadline.

Once institutions have made their assessment, they can then apply for transitional relief of up to two years.

However, she stressed all other Basel II requirements apply from 1 January, including the new securitisation capital calculations for standardised and internal ratings based banks. “The transition relief applies only to changes to operational aspects of the standard, such as clean sale provisions and facility criteria, and only to pre-existing programs and facilities, that is, those issued before 1 January,” she said.

See Risk Management magazine. www.riskmanagementmagazine.com.au

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