When banks package up mortgages and other loans into bonds which are then sold to investors, lenders are not required to hold capital against these loans as APRA expects the banks to have clearly transferred the economic exposure and risk of the mortgages to investors. Investors receive a regular dividend from loan repayments in securitised loans.
However, APRA found that banks had been providing “implicit support” for loans by repurchasing mortgages that were subject to repayment deferral from securitised bonds. APRA’s prudential standard 120 requires that banks repurchase loans from securitised bonds only under limited circumstances and only if the borrower is not in distress.
Value of frozen loans falls
Buying back loans in distress would “undermine the principle of a clear transfer of credit risk that is at the heart of the regulatory treatment of securitisation”, said APRA executive director of banking Therese Hockey.
APRA last month said the value of frozen loans had fallen 68 per cent from the peak in June when it was estimated that 10 per cent of all SME loans and mortgages – worth $274 billion – were placed on hold.
APRA’s last update said just 3 per cent of the industry’s loan book – or $88 billion in loans – remained frozen.
APRA has demanded that all lenders publicly disclose how many loans they have repurchased as part of upcoming regulatory reporting and to bring in independent experts to review compliance procedures for the banks’ respective programs.
The regulator said it would name and shame lenders caught in the wrong, and some could be forced to “hold additional regulatory capital”.
“Self-identification and timely reporting by [banks] to APRA of non-compliance will be favourably considered by APRA when determining the appropriate actions,” Ms Hockey said.
Australia’s banking sector generates about $35 billion in securitised residential mortgage bonds each year.