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.
Keywords: Asia Pacific, Australia, Banking, Regulatory Capital, FAQ, Basel, Credit Risk, APS 112, APS 113, Credit Conversion Factor, APRA
Previous ArticleUS Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.
The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.
The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.
The European Banking Authority (EBA) published a methodological guide to mystery shopping.
The Australian Prudential Regulation Authority (APRA) released a letter to authorized deposit-taking institutions to provide an update on key policy settings for the capital framework reforms, which will come into effect from January 01, 2023.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report that assesses the business continuity planning activities of financial market infrastructures or FMIs.
The Bank of England (BoE) published questions and answers (Q&A) on OSCA to BEEDS migration for statistical reporting as well a presentation from the project overview session held with statistical reporters.
The Basel Committee on Banking Supervision (BCBS) is consulting on a technical amendment to the Basel Framework to reflect a new process reviewing the global systemically important bank (G-SIB) assessment methodology.