(30 August 2010 – Australia)The Australian Prudential Regulatory Authority (APRA) has issued a warning to the nation’s authorised deposit-taking institutions (ADI).The banking regulator has said that some firms may need to change the way in which they account for and treat subordinated tranches of residential mortgage-backed securities.
At the end of last week APRA reaffirmed a series of standards for the capital treatment of RMBS, while simultaneously firing a warning at some mortgage writers and lenders.
Post GFC, Australian deposit-taking institutions have been able to sell senior tranches of RMBS at significantly improved pricing, but have been forced to keep subordinated tranches on their books.
According to APRA, some deposit-taking institutions ‘have concluded appropriately that such a structure fails to meet the fundamental requirement for significant credit risk transfer and have retained the requisite risk assets and capital requirements on their balance sheets.’
‘In other cases, however, . . . regulatory capital relief for credit risk has been claimed inappropriately’, APRA added.