(Adds comment, detail on Australian securitisation)
By Cecile Lefort
SYDNEY, Nov 26 (Reuters) - Australia's financial watchdog on Thursday proposed simplifying rules for securitisation, a move that could lower funding costs for banks and help offset rising capital costs.
In a long-awaited draft, the Australian Prudential (L:PRU) Regulation Authority (APRA) said it planned to remove a "skin-in-the-game" credit risk retention requirement, while allowing for more flexibility in certain forms securitisation.
"APRA has gone a long way to simplify the approach to securitisation," said Chris Dalton, chief executive officer of industry body the Australian Securitisation Forum, sharing his initial thoughts following the release of the 35-page draft.
"It is simpler and more straight forward than what is put in place or being considered internationally."
Eliminating the "skin-in-the-game" requirement, a measure to make sure lenders keep some exposure to the securitised assets sold to investors, would run counter to measures that have been adopted abroad.
"Introducing an additional Australian requirement would run contrary to APRA's objective of creating a simplified framework," said the regulator, highlighting sufficient incentives already embedded in securitisations to maintain the quality of lending standards in Australia.
APRA is considered among the world's toughest regulators and is a major reason why Australian banks came out relatively unscathed by the 2007-2008 global financial crisis.
Yet, the regulator is supportive of securitisation because it is a funding diversification tool for banks.
Australia is among the world's top four largest residential mortgage-backed securities (RMBS) markets for new issues. There are around A$85 billion of notes outstanding, according to industry data.
There has never been an RMBS default in Australia, unlike the United States or Europe where investors lost billions of dollars.
APRA's draft also opened the door to the use of master trusts, a widely used structure in international securitisation deals but not allowed in Australia. A master trust is an investor-friendly structure which reduces the risk of prepayment.
Dalton said their approval would allow banks to diversify their funding in international markets and could help lower funding costs.
Australia's major banks - Commonwealth Bank of Australia CBA.AX , Westpac Banking Corp WBC.AX , ANZ Banking Group ANZ.AX and National Australia Bank NAB.AX were told by the regulator in July to lift their capital ratios by at least 200 basis points to put them on par with international peers.
APRA also said in its draft it would allow for more flexibility in warehouse arrangements - a short-term revolving credit facility provided by a bank to a mortgage loan originator to fund homeloans.
The regulator said it was seeking feedback on the plans by March 1, 2016.