APRA Proposes Revisions to Risk-based Capital Framework for Banks

Revisions to the capital framework for authorized deposit-taking institutions. This paper outlines the main components of the revisions APRA expects to make to the risk-based capital requirements for authorized deposit-taking institutions using the advanced and standardized approaches to credit, market, and operational risks. Meanwhile, APRA will undertake further analysis (including a quantitative impact study) of the impact of the proposed changes on authorized deposit-taking institutions. The outlined proposals are as follows:

• Additional constraints on the use of authorized deposit-taking institutions’ own risk-parameter estimates under the internal ratings-based (IRB) approach to determining capital requirements for credit risk
• The treatment of exposures to small- to medium-size enterprises, including those secured by residential property, under the standardized and IRB approaches to credit risk
• Other changes to regulatory capital requirements for commercial property exposures and retail exposures (other than those secured by residential property) and to credit conversion factors applying to off-balance sheet exposures
• The operational risk capital framework, including the replacement methodology for the advanced measurement and standardized approaches
• Timeline of APRA for implementing the Basel Committee’s revised market risk framework
• The treatment of interest rate risk in the banking book
• Proposal for a simpler capital framework for small authorized deposit-taking institutions, which is intended to reduce regulatory burden without compromising prudential soundness

Later this year, APRA also plans to release a paper on potential adjustments to the overall design of the capital framework to improve transparency, international comparability, and flexibility. APRA expects to release draft revised prudential standards on the standardized and IRB approaches to credit risk and operational risk later in 2018. Other draft prudential standards incorporating the remaining Basel III revisions will be released for consultation in mid-2019. APRA continues to propose an implementation date of January 01, 2021 for all revised measures, including the full risk-weighted asset floor, but invites feedback on the merits of aligning with the Basel Committee timetable and deferring implementation until January 01, 2022. 

Paper on leverage ratio requirements for authorized deposit-taking institutions. This paper contains APRA proposals for applying a minimum leverage ratio requirement for authorized deposit-taking institutions. Consistent with the Basel III framework, APRA proposes that the leverage ratio of an authorized deposit-taking institution be expressed as the ratio of tier 1 capital to total exposures, largely based on financial accounting measures. In calibrating the leverage ratio, APRA intends to apply a differential minimum leverage ratio requirement for authorized deposit-taking institutions that use the standardized approach and those that use the IRB approach to determine capital adequacy. As IRB institutions tend to have more complex balance sheets, with a greater proportion of off-balance sheet exposures and a greater reliance on modeled risk estimates in their risk-based capital measures, their leverage is inherently more difficult to measure. For this reason, APRA is proposing a minimum leverage ratio of 4% for IRB institutions and 3% for standardized authorized deposit-taking institutions.

Related Links

• Press Release
• Discussion Papers

Comment Due Date: April 27, 2018 (leverage ratio rules) and May 18, 2018 (capital framework revisions)

Effective Date: July 01, 2019 (leverage ratio rules)

Keywords: Asia Pacific, Australia, Banking, Basel III, Capital Framework, Leverage Ratio Requirements, IRB Approach, Credit Risk, Proportionality, APRA