APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets. The answer specifies the appropriate credit conversion factor to be used in determining the regulatory capital for insurance standby letters of credit. An insurance standby letter of credit is issued by an authorized deposit-taking institution to an insurer whereby the authorized deposit-taking institution "guarantees" payment to the insurer in the event that the reinsurer defaults.
Paragraph 1 of Attachment B to the prudential Standard APS 112 (Capital Adequacy: Standardized Approach to Credit Risk) sets out the credit conversion factors to be applied to different categories of non-market-related off-balance sheet transactions under the standardized approach to credit risk. Paragraph 9 of the prudential practice guide APG 112 provides further guidance on the categorization of non-market-related off-balance sheet transactions. Insurance standby letters of credit fall into the category of "direct credit substitutes" (and, therefore, a 100% credit conversion factor is to be applied under the standardized approach). This is because the primary purpose of the letter of credit is to support the claims paying ability of the reinsurer, which is a monetary or financial obligation.
Under paragraph 27 of Attachment B to the prudential standard APS 113 (Capital Adequacy: Internal Ratings-based Approach to Credit Risk), authorized deposit-taking institutions using the Foundation IRB approach must generally apply the credit conversion factors in Attachment B to APS 112. Furthermore, under paragraph 31 of Attachment B to APS 113, products that are assigned a 100% credit conversion factor under the standardized approach are not eligible to be modeled by authorized deposit-taking institutions using the advanced IRB approach. As a result, APRA expects that all insurance standby letters of credit are to be assigned a credit conversion factor of 100%, irrespective of the approach taken by the issuing authorized deposit-taking institution, to determining regulatory capital requirements.
Related Links
Keywords: Asia Pacific, Australia, Banking, Regulatory Capital, FAQ, Basel, Credit Risk, APS 112, APS 113, Credit Conversion Factor, APRA
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Previous Article
IASB Updates IFRS Taxonomy to Reflect Benchmark Reform AmendmentsRelated Articles
EU Amends CRD4 and CRD5 as Part of Capital Markets Recovery Package
EU published Directive 2021/338, which amends the Markets in Financial Instruments Directive (MiFID) II and the Capital Requirements Directives (CRD 4 and 5) to facilitate recovery from the COVID-19 crisis.
EU Committee Recommends Systemic Risk Buffer of 4.5% in Norway
The Standing Committee of the European Free Trade Association (EFTA) recommended that a systemic risk buffer level of 4.5% for domestic exposures can be considered appropriate for addressing the identified systemic risks to the stability of the financial system in Norway.
PRA Clarifies Approach to Onshoring of Credit Risk Rules for UK Banks
In a recent statement, PRA clarified its approach to the application of certain EU regulatory technical standards and EBA guidelines on standardized and internal ratings-based approaches to credit risk, following the end of the Brexit transition.
FSB Sets Out Work Priorities for 2021
In a recently published letter addressed to the G20 finance ministers and central bank governors, the FSB Chair Randal K. Quarles has set out the key FSB priorities for 2021.
EU Publishes Corrigendum to Revised Capital Requirements Regulation
EU published, in the Official Journal of the European Union, a corrigendum to the revised Capital Requirements Regulation (CRR2 or Regulation 2019/876).
ESAs Issue Statement on Application of Sustainability Disclosures Rule
ESAs published a joint supervisory statement on the effective and consistent application and on national supervision of the regulation on sustainability-related disclosures in the financial services sector (SFDR).
EC Consults on Crisis Management and Deposit Insurance Frameworks
EC published a public consultation on the review of crisis management and deposit insurance frameworks in EU.
HKMA Enhances Loan Guarantee Scheme to Alleviate Pressure on SMEs
HKMA announced that enhancements will be made to the Special 100% Loan Guarantee of the SME Financing Guarantee Scheme (SFGS) and the application period will be extended to December 31, 2021.
EBA Proposes Standards for Supervisory Cooperation Under IFD
EBA launched consultations on the regulatory and implementing technical standards on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms.
BoE Addresses Banks in Scope of First Resolvability Assessment
BoE issued a letter to the CEOs of eight major UK banks that are in scope of the first Resolvability Assessment Framework (RAF) reporting and disclosure cycle.