APRA Chair John Laker recently presented a paper called EMERGING ISSUES IN THE PRUDENTIAL LANDSCAPE to the Building Society Association Directors’ Forum.

He discussed credit issues as well as general regulatory issues.

He also made some interesting comments about a second evolving business model for business societies:

I would characterise the two main models as:
• the ‘traditional’ — societies that focus primarily on writing standard housing loan products to retain on-balance sheet. Few if any off-balance sheet activities are undertaken; and
• the ‘securitisor/manager’ — at the other end of the spectrum, societies that focus primarily on converting their housing loan assets into tradeable securities, and managing the securitised assets…

Directors of building societies pursuing the securitisor/manager model need to satisfy themselves that their society:
• has a robust risk management framework for securitisation activities which identifies the range of inherent risks involved and establishes processes for monitoring and mitigating these risks;
• has a management information system that can provide a comprehensive reporting of all costs and income associated with these activities. These costs should, of course, include the origination costs of loans sold to the securitisation vehicle; and
• conducts appropriate analysis of the profitability and long-term viability of these activities. This analysis should involve allocation of an amount of ‘economic capital’ against the risks in securitisation and an assessment of return on capital against the society’s hurdle rate.