Originating ADIs holding subordinated tranches: APRA seeks to clarify

APRA's clarification of its policy on the regulatory capital treatment of certain securitisation exposures held by ADIs goes some way to meeting industry concerns, but leaves some unresolved questions.

By contrast, the second stream of Government banking reforms allays concerns over the effects of the policy on funding costs for originating ADIs, and gives some incentives for growth, especially in the bullet RMBS market.

What was APRA's position in August?

In a letter from APRA to all ADIs on 26 August 2010, APRA stated its view that originating ADIs that hold or retain the most subordinated tranche(s) in a securitisation, absent any externally provided credit enhancement (other than lenders' mortgage insurance and/or excess spread), will not be considered to have transferred significant credit risk to third parties for the purposes of paragraph 13 and Attachment B, paragraph 2 of Prudential Standard APS 120 Securitisation (APS 120).