APRA’s Charles Littrell has given a speech discussing the issues behind proposed securitisation reforms and changes to APS 120 which will be published soon.

The securitisation market collapsed in 2008-2009 but has since improved.

Key points from APRA’s review:

“by and large conventional Australian RMBS arrangements were sound, in both a liquidity and credit sense.

Moving from origination to investments, we discovered that securitisation, as one of the family of complex structured credit arrangements, could facilitate losses from investments thought to be secure, but which were in fact highly risky.

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.”