Securitisation Benefits
Regulatory Capital Relief
Banks and other Authorised Deposit Taking Institutions (ADIs) are required to maintain a required level of regulatory capital. Under the Australian Prudential Regulatory Authority's (APRA) Australian Prudential Standard (APS 120), an ADI is not required to hold capital against securitised assets provided it achieves off-balance sheet treatment for the asset according to Australian accounting standards. This requires:
- the transfer to the SPV be a 'true sale' for accounting purposes
- the SPV not be consolidated with the accounts of the originator.
Until the introduction of the International Financial Reporting Standards (IFRS) into Australia for the first annual reporting period on or after 1 January 2005, most securitisation structures achieve off balance sheet treatment and therefore the ADIs have not been required to hold capital against securitised assets.
With the introduction of the IFRS framework into Australia from 1 January 2005, it is unlikely that banks will achieve off balance sheet treatment for the asset. APRA has signalled that it will divorce accounting from capital treatment such that capital need not be held merely because the assets are back on balance sheet or the SPV is consolidated.
Diversify funding sources
Securitisation opens up access to new investor bases and funding sources that can provide resilience in times of liquidity crises.
Enhance liquidity
Securitisation transforms illiquid asset pools into marketable securities that when transferred into cash, can enhance originator liquidity. Lower rated originators may also be capped in how much access they have to the capital markets in their own name. Securitisation can create new credit lines that can increase their access to debt capital markets.
For banks, some RMBS can now be classified as part of their highly liquid holdings. RMBS usually earns a higher return than other forms of highly liquid holdings such as cash, bank bills or government bonds.
Reduce cost of funds
For lower rated originators, securitisation can often achieve a lower cost of funds than raising debt in their own name. Once the capital benefits are factored into the equation, especially when issuance margins are tight, securitisation can achieve favourable all in cost of funds to alternative sources for higher rated originators as well.
Accelerate cash flow
Securitisation can bring forward receipt of future cash flows for the originator. This can assist in liquidity and working capital management.
Recharacterise income
The process of securitisation can lead to a recharacterisation of income, including the ability to bring forward (or sometimes delay) the recognition of that income in the originator's accounts. It can turn asset interest into servicing and other fee income, which may be more attractive to originators, as fee income is less volatile than interest income.
Enhance strategic profile
An originator who may want to enhance their profile in the capital markets, often with a view to tapping into the market in their own name at some later stage, may choose to build up recognition and track record through a securitisation program.
Manage and match asset/liability profile
Securitisation transactions often issue pass-through securities, whose repayment obligations effectively match the repayment characteristics of the underlying assets.
Extend available tenor
Securitisation may afford tenors that are longer than those available in the vanilla debt capital markets and bank debt markets. This is a strong risk management benefit for originators of longer dated assets.
Transfer risk and cap the originator's credit risk
By securitising assets, some or most of the credit risk of those assets can be transferred to investors, with the originator's exposure limited to the portion that it retains as credit enhancement.
Encourage best practice
The process of securitisation opens up originators to external review by bankers, investors, lawyers, accountants, trustees and rating agencies. This can often provide originators with insights into market best practices. Some originators find that building the system capability to generate the reports needed to support securitisation provides them with increased insights into their business and risk management.
