Australia to Toughen Reporting Rules for Mortgage-Backed Bonds

Australia’s central bank announced stricter reporting standards for residential mortgage-backed securities as it prepares to hold the notes as collateral in return for a standby funding facility for lenders.

The Reserve Bank will demand more information on securitizations and the underlying mortgages for the debt to be eligible for repurchase agreements, according to a statement today. The central bank is making the changes ahead of the 2015 introduction of a liquidity backstop, which will help banks meet so-called Basel III rules forcing them to hold more easily saleable assets.

“RMBS will potentially comprise a significant share of the securities that authorized deposit-taking institutions will hold to access the facility,” the RBA said in its statement. The additional requirements announced today will allow the central bank to “more precisely value these securities and assess their risk,” according to the statement.

Australian lenders accessed cash by lodging securitized mortgages from their own balance sheets with the RBA after the U.S. subprime mortgage collapse in 2008 sparked a global credit freeze and saw asset managers shun bonds backed by home loans. The new reporting rules will also help the market recover from the financial crisis by making more information available to investors, according to Assistant Governor Guy Debelle.

‘More Transparency’

“There is an increasing demand for more transparency in securitization from both investors and regulators alike,” Debelle, who heads the Reserve Bank’s financial markets division, said in a speech today in Sydney. “One objective for improving transparency is to ensure that investors, other market participants and regulators all have access to relevant and reliable information in order to monitor risk.”

Debelle, who didn’t address monetary policy or the economy in his prepared remarks, said the proposed reporting templates are open for comment until the end of December. Draft templates for other type of asset-backed securities, such as those backed by auto loans, credit cards and commercial mortgages, will be published next year, according to the central bank’s statement.

“An increased transparency that extends down into individual loans backing RMBS will be a good development, as such information is generally hard to access,” said Raymond Lee, a portfolio manager in Sydney at Kapstream Capital, which oversees A$4.9 billion.

Tougher Regulation

The Basel Committee on Banking Supervision is seeking to bolster banks’ liquidity and capital to prevent a repeat of the credit crisis that deepened when Lehman Brothers Holdings Inc. collapsed in 2008. Australia’s lenders largely stayed profitable and didn’t require bailouts during that crisis, which forced financial institutions worldwide to raise $1.6 trillion of capital amid more than $2 trillion of losses.

While banks in most countries will meet the liquidity requirements predominantly through holding government debt, there aren’t enough sovereign bonds outstanding in Australia for lenders to buy, the banking regulator and the RBA said in a statement in December 2010, when they announced the plan for the central bank to offer contingency loans.

Debelle said that while the nation’s mortgage bond market has “gradually improved,” it shouldn’t be expected to return to pre-crisis levels.

“But there is scope for it to recover further yet,” he told the Australian Securitization Forum. “One avenue that may facilitate further growth is the availability of more information, and more standardized information, than exists currently.”

Responding to questions from the audience, Debelle said the RBA doesn’t see any particular trend developing in a “very low” rate of mortgage arrears. Mortgage-backed securities in Australia are “well protected,” he said.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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