APRA Issues Update on Capital Reform Policy Settings for Banks
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 letter provides an early indication on key policy settings for the framework, to help the industry plan ahead for implementation. Later this year, APRA is expected to finalize the prudential standards on capital adequacy (APS 110), on standardized approach to credit risk (APS 112), and on internal ratings-based approach to credit risk (APS 113). Though this letter is not a formal consultation, institutions can provide feedback on the proposed policy settings by August 20, 2021. To understand the impact of the proposed revisions, APRA will conduct an optional quantitative impact study for authorized deposit-taking institutions, the responses for which are also due by August 20, 2021.
The letter provides an update on the December 2020 consultation on the capital framework, with a targeted data study to be provided separately to participating institutions. This data study was foreshadowed in the early June 2021 letter on roadmap to 2023, which also set out a clear timeline to finalize the consultation phase by November 2021. The Annexes to letter detail the intended policy settings, under which APRA intends to:
- maintain the approach to capital buffers outlined in the consultation package, including a base level for the countercyclical capital buffer (CCyB) of 1.0% of risk-weighted assets, as part of APS 110.
- modify the proposed capital requirements for higher risk residential mortgage lending, with changes to the definition of long-term interest only loans, as part of APS 112.
- revise certain settings to calibrate the new framework to meet the unquestionably strong benchmarks and simplify requirements, as part of APS 113.
Also, in December 2020, APRA did not specify how domestic public sector entities should be treated in APS 113. To clarify, the internal ratings-based institutions would include domestic public sector entities in the definition of financial institution under APS 113. Institutions would also apply an asset value correlation multiplier set to one in calculating risk-weighted assets arising from exposures to domestic public sector entities. Nevertheless, the full suite of policy settings is not yet final and there may be further revisions to these and other issues as APRA finalizes the prudential standards later this year. Consistent with the roadmap to 2023, APRA aims to release final prudential standards in November 2021, which will come into effect from January 01, 2023.
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Comment Due Date: August 20, 2021
Keywords: Asia Pacific, Australia, Banking, Regulatory Capital, Basel, APS 110, APS 112, APS 113, Credit Risk, Standardized Approach, IRB Approach, APRA
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