The Australian Prudential Regulation Authority (APRA) issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900). The discussion paper sets out rationale for the proposed standards, which are intended to strengthen crisis preparedness across banks, insurers, and superannuation trustees. The consultation period on these prudential standards ends on April 29, 2022, with APRA proposing for the new prudential standards to come into force from January 01, 2024. APRA also plans to consult on supporting guidance material for these standards in 2022.
The following are the key highlights of the proposals:
- CPS 190 on financial contingency planning. This proposed standard introduces requirements for the regulated entities to develop contingency plans to respond to financial stress by either recovering their financial resilience or exiting regulated activities in an orderly manner. The key elements of the proposed standard include developing a financial contingency plan, maintaining capabilities to execute the financial contingency plan, and regularly reviewing the contingency plans. Under the proposed CPS 190, larger or more complex entities would be subject to heightened requirements, whereas smaller, less complex entities will have fewer and simpler requirements. Smaller or less complex entities will likely focus their efforts on a smaller range of credible contingency options, which reduces the planning required to achieve a prudent level of crisis preparedness.
- CPS 900 on resolution planning. This proposed standard requires large or complex entities, or those that provide critical functions to the economy, to be prepared for resolution to minimize the impact on the community and the financial system. The proposed standard has been designed to embed the APRA approach to loss-absorbing capacity within the prudential framework for resolution planning and is thus being published along with the letter conveying the loss-absorbing capacity requirements. The key elements of the proposed CPS 900 include assessing feasibility of resolution options, implementing pre-positioning steps necessary for the execution of the resolution plan, and maintaining capabilities to support the plan. The proposed CPS 900 will only apply to the significant financial institutions or entities that are involved in the critical functions to the economy. As part of the proposal, APRA may impose obligations on these entities to support resolution planning, including requirements to maintain additional loss-absorbing capacity. APRA would determine such obligations as part of its resolution planning for individual entities.
In its letter on the finalized loss-absorbing capacity requirement for D-SIBs, APRA informs the D-SIBs that this requirement will be set as an increase to minimum total capital requirements of 4.5 percentage points of risk-weighted assets on a Basel III basis. The requirements are for the four major banks that have been designated as D-SIBS and will come into effect from January 01, 2026. APRA also specified the minimum total capital requirement that will apply to a D-SIB from 2026: the minimum total capital requirement, including regulatory buffers, will be 18.25%, inclusive of the additional loss-absorbing capacity and other changes from the broader capital reforms for authorized deposit-taking institutions. APRA does not expect the increase in capital requirement that is applicable from 2026 to have a material impact on market capacity for Tier 2 capital instruments. D-SIBs have already met the bulk of the required increase, given their progress in meeting the interim requirement. The interim setting was an increase in the minimum total capital requirement for the D-SIBs of three percentage points of risk-weighted assets, to be met by January 2024. D-SIBs have already met this level and issued more than AUD 50 billion of Tier 2 capital in recent years. APRA anticipates that D-SIBs may issue a further AUD 20 billion of Tier 2 capital, in aggregate, to meet their final requirement.
Comment Due Date: April 29, 2022 (Proposed Standards)
Effective Date: January 01, 2024 (Proposed Date for Standards)
Keywords: Asia Pacific, Australia, Banking, Contingency Planning, Resolution Planning, CPS 190, CPS 900, Resolution Framework, D-SIB, Loss Absorbing Capacity, Regulatory Capital, Basel, Tier 2 Capital, TLAC, Crisis Management Framework, APRA
Previous ArticleHKMA Consults on FIRO Code, Revises Policy on Foreign Exchange Risk
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.