APRA published a discussion paper proposing revisions to the capital framework for authorized deposit-taking institutions. The discussion paper builds on prior stakeholder feedback and provides a high-level overview of the proposals and their indicative impact. In addition, APRA is consulting on the drafts of the prudential standards on capital adequacy (APS 110), standardized approach to credit risk (APS 112), and internal ratings-based approach to credit risk (APS 113). The feedback period for these proposals closes on April 01, 2021 while the new framework is expected to be finalized by late 2021 and proposed to be implemented from January 01, 2023.
APRA also published its response to the technical issues raised in the prior consultations on amendments to the capital framework. The prior consultations include the August 2018 consultation on improving the transparency, comparability, and flexibility of capital framework, the June 2019 consultation on the revisions to the capital framework, and the November 2019 consultation on the leverage ratio requirement for authorized deposit-taking institutions. Nevertheless, the current proposals aim to calibrate the revised capital framework to meet the objective of "unquestionably strong" capital, to align the framework with the internationally agreed Basel III framework, and to improve flexibility of the framework in responding to situations of heightened risk or stress. The proposed improvements to the capital framework include the following:
- Improving the flexibility of the capital framework. This is proposed to be achieved primarily by increasing the size of regulatory capital buffers, which are available to be utilized in times of stress. This would be done in two ways: one way is by calibrating the framework to include a default level of the countercyclical capital buffer (CCyB) of 100 basis points of risk-weighted assets for all authorized deposit-taking institutions; the other way is the utilization of the internal ratings-based approach (IRB) by authorized deposit-taking institutions to determine their capital requirements and increase in the capital conservation buffer (CCB) from 250 to 400 basis points of risk-weighted assets.
- Implementing more risk-sensitive risk-weights, particularly for residential mortgage lending. Given the extent of mortgage lending on Australian bank balance sheets, APRA is proposing a more risk-sensitive approach for determining the capital requirement for mortgage exposures.
- Enhancing competition. This would involve implementing a floor to limit the capital benefit of IRB institutions relative to the capital requirement for authorized deposit-taking institutions utilizing the standardized approach, in addition to more generally limiting some of the differences between standardized and internal ratings-based capital outcomes.
- Improving transparency and comparability. This would be done by better aligning standards of APRA with the internationally agreed Basel III capital framework and by requiring IRB institutions to also publish their capital ratios under the standardized approach.
- Applying a proportionate approach for smaller authorized deposit-taking institutions with less than AUD 20 billion in total assets. For these authorized deposit-taking institutions, a simplified capital framework will be applied to reduce regulatory burden without compromising prudential safety.
APRA is particularly seeking views on the proposals on capital framework, regulatory capital buffers, and the capital floor for IRB institutions. Views are also being sought on the revised eligibility criteria for, and components of, the simplified framework for smaller institutions as well as on the draft APS 110, APS 112, and APS 113. In addition, APRA is seeking feedback on whether the proposed implementation date of January 01, 2023 should be brought forward for the full implementation of the reforms and on estimates of the cost impact arising from the regulatory changes set out in these proposals. As part of this consultation, APRA will be undertaking a quantitative impact study (QIS) among a number of authorized deposit-taking institutions. APRA will use the collected data to refine proposals set out in the draft prudential standards and to ensure that the capital framework is appropriately calibrated to meet the "unquestionably strong" capital benchmarks. APRA will shortly contact a sample of authorized deposit-taking institutions, comprising a range of different-sized entities, to request participation in the study on a "best endeavors" basis.
Comment Due Date: April 01, 2021
Effective Date: January 01, 2023 (Proposed)
Keywords: Asia Pacific, Australia, Banking, Regulatory Capital, Basel, Credit Risk, Standardized Approach, IRB Approach, Risk-Weighted Assets, APS 110, APS 112, APS 113, APRA
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