PRUDENTIAL REFORM IN SECURITISATION
Executive General Manager
Australian Prudential Regulation Authority
Australian Securitisation Forum
Sydney
11 November 2013
From the mid-1990s to 2007, APRA and industry discovered that securitisation possesses many attractive features,
which are particularly relevant to Australian home lending. These attractive features probably started with
contestability:
securitisation allowed non-ADI lenders, and smaller ADI lenders, to enter and compete with Australia’s major banks for home loans, across the country. This in turn substantially improved competition, and from the mid-1990s we saw a marked reduction in lending spreads on home loans.
...............up to about 2007 APRA was becoming concerned, but not yet alarmed, by some of the trends we saw in
the securitisation market. Concern grew from the industry’s evident addiction to unnecessarily complex structures,
and the sense that some originators were treating securitisation, combined with lenders mortgage insurance, as a
kind of perpetual motion machine.
Lending could be increased without the need to increase the liquidity or capital backing for this lending.
There was also the concern that whatever rule APRA put in place, the industry sometimes sought corner solutions, which might technically comply with the letter, but not necessarily the spirit, of the relevant standard.
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We also learned that securitisation could have more systemic implications than regulators thought was the case
prior to 2008. If securitisation makes aggressive lending too easy in good times, but isn’t available to fund sound lending in adverse capital markets, then pretty clearly securitisation is pro-cyclical. This is unhelpful in a systemic sense. APRA is hopeful that its proposed reforms will reduce the pro-cyclical element in securitisation.
Then there was the surprise that all the complexity in the market, touted in various forums as innovation and completing markets, turned out to be, by and large, simply a way to conceal bad credit risks from end-investors.
These investors, having learned that some complex and opaque instruments could not be trusted, panicked en masse and fled from all complex credit including unsecured lending to otherwise sound banks.
And then we discovered that banking systems reliant upon wholesale and short-term credit to fund assets, including but not limited to securitisation arrangements, could require strenuous public sector intervention to keep the banking system liquid.
We also discovered that the Australian Government, should it wish to keep the Australian securitisation market at
least partially open in bad times, might need to become an investor in that market.
in summary, from say 2007 to 2011 there was a fundamental global re-assessment about the value attaching to securitisation, and much of that re-assessment was distinctly negative. And yet, even with all these issues, it seems clear that there is nothing wrong with the basic idea of securitisation. Nothing about the GFC disproved the potential value of securitisation in theory.
There was an appalling range of lessons about the dangers that attach to securitisation in practice, when the tool is
used to facilitate poor quality lending, fragile funding, and opaque securities origination.