Banks may have to look for a wider range of investors for the junior tranche of mortgage-backed and asset-backed securities if the Australian Prudential Regulation Authority proceeds with plans outlined yesterday to re-fashion the regulations that apply to this form of funding.APRA's executive general manager, research and statistics, Charles Littrell, outlined the regulator's approach to a prudential reform of securitisation yesterday. This will be spelled out in detail in a consultation paper to be issued in the New Year.Littrell proposed that asset-backed securities issued under reforms likely to be introduced by would have only two tranches - an A note and a B note tranche. Issuers looking for capital relief would have to hold 20 per cent of the B notes and would not be allowed to sell the rest of the tranche to another approved deposit-taking institution.Speaking at the Australian Securitisation Forum annual conference in Sydney, Littrell said: "In our proposed reforms, APRA intends to push three themes: explicitly catering to funding-only securitisation, subject to some prudential limits; greatly simplifying the overall prudential regime; and addressing… agency risk, liquidity risk and business model risk."APRA proposes that, in a securitisation structure, the A tranche would comprise about 90 per cent of a typical home loan securitisation. The expectation is that the A tranche would be AAA-rated.All A-tranche notes would be equal in credit seniority terms, but the A tranche may consist of issues with varying maturity.ADIs would be free to trade in their own A notes; the current 20 per cent rule would be abolished. ADIs would also be able to trade in other issuers' A notes. In a funding-only securitisation, where the originating ADI retains all the credit risk, the B notes would be held by the issuer. "APRA's expectation is that the B notes will comprise the current mezzanine and equity tranches of a securitisation," Littrell said.In a securitisation designed for capital relief, ADIs would be allowed a pari passu capital reduction to the extent that B notes are sold, but with a minimum retention of around 20 per cent, to reduce agency risks associated with unconstrained and non-recourse lending. "This is the skin in the game requirement," Littrell said.He said APRA's expectation was that ADIs would place B notes with investors outside the ADI sphere. ADIs holding another issuer's B notes would attract a 100 per cent equity deduction for any such holding.Littrell said: "ADIs swapping B notes create no net credit transfer but do shift risk from the original full-informed lender to less informed secondary lenders."Other than banks, there are few investors in the equity tranches in mortgage-backed securities. If the APRA proposals are adopted, banks and their advisers will have to identify more investors, including those who currently shirk the asset class because of constraints in their mandates.APRA plans to consult on its proposals next year and have the new standards in place by 2014.