Assets outside the cover poolAssets outside the cover pool

Assets outside the cover pool

28. An asset held by the covered bond special purpose vehicle must be treated for purposes of applying Prudential Standards, including calculating capital requirements, related-party exposures and large exposures, as an asset of the issuing ADI if:

(a) the asset is listed on a register of assets not securing covered bond liabilities in accordance with paragraph 18 above;

(b) the issuing ADI has an unconditional authority to deal with the asset, including to require that it be returned to the ADI at any time;

(c) the issuing ADI has unequivocal enforcement rights over a mortgaged residential property (including a power of sale and a right to possession) in the event of default by the borrower; and

(d) contractual documentation provides for the asset to return to the issuing ADI immediately following a default under the covered bond.

29. For the purposes of paragraph 28, if an issuing ADI retains an interest in collateral that is shared with an asset in the cover pool, it will not be treated as satisfying the test in paragraph 28(c) unless there is a formal second mortgage arrangement in place that meets the requirements of Attachment A of Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112).

30. If an asset held by a covered bond special purpose vehicle:

(a) does not form part of the cover pool; and

(b) does not meet the criteria set out in paragraphs 28(a) to (d) above,

it must be treated as an asset of the issuing ADI for the purposes of applying Prudential Standards, including related‑party exposures and large exposures, but such an asset must, for capital adequacy purposes, be risk‑weighted at the greater of 100 per cent or the relevant risk‑weight detailed in APS 112.

31. APRA may, at its discretion, require an issuing ADI to obtain at the ADI’s expense an opinion, from an appropriate independent expert agreed by APRA, on whether an asset meets the requirements of paragraphs 28(a) to (d).

32. Issuing ADIs must ensure that the amount of assets held by their covered bond special purpose vehicles otherwise than as part of a cover pool, is not more than is reasonable for the efficient operation of the ADI’s covered bond program.