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Australia Regulator Plans ‘Simpler, Safer’ Securitization Market

Australia’s banking regulator is working on securitization reforms that it says will make the nation’s market for such debt simpler, safer and more attractive to global investors.

The Australian Prudential Regulation Authority is preparing a discussion paper that it plans to publish early next year before adopting the new rules in 2014, Charles Littrell, executive general manager at APRA, said in a speech in Sydney today. Securitizations for funding purposes are proposed to have a senior, top-rated ‘A’ portion that can be traded and a ‘B’ class of notes held by the originating lender, he said.

“We want to ensure that Australian securitization arrangements do not encourage lax lending or tempt market participants to take advantage of each other through excess complexity,” Littrell told the Australian Securitisation Forum conference. “APRA expects that Australian ‘A’ notes will be among the safest and simplest securitization investments available globally. This should help restore and protect Australian access to local and global securitization markets.”

The boom in the U.S. and European markets for securitized debt in the years leading up to 2008 has been identified by regulators as one of the main reasons for the collapse of Lehman Brothers Holdings Inc. and the financial turmoil that followed, as lenders struggled with a plunge in the debt’s market value.

Australian entities were the “victims rather than the instigators” of structured credit investments that were more likely to fail than investors expected, Littrell said. The fact that the securitization market slammed shut even for highly-rated issues amid the global credit freeze showed that it shouldn’t be heavily relied on for funding, he said.

While Australian lenders seeking capital relief can sell some of their ‘B’ notes, the proposals would force them to hold at least 20 percent of the securities to meet so-called skin in the game requirements, according to Littrell’s speech. APRA intends to discourage lenders from buying each other’s ‘B’ notes by imposing capital penalties, he said.

Lenders “swapping ‘B’ notes create no net credit transfer, but do shift risk from the original, fully informed lender to less informed secondary lenders,” Littrell said. “APRA would much prefer to see ‘B’ notes shifted to less levered investors, such as insurance companies and superannuation funds.”

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