June 12, 2019

APRA published a paper in response to the first round of consultation on proposed changes to the capital framework for authorized deposit-taking institutions. The response paper covers the initial proposals of APRA on revised credit risk and operational risk requirements and simpler prudential requirements for small, less complex authorized deposit-taking institutions. APRA is also consulting on the draft prudential standards on standardized approach to credit risk (APS 112); the draft internal ratings-based (IRB) approach to credit risk, with residential mortgages extract only (APS 113); and the draft standardized measurement approach to operational risk (APS 115). The comment period for this consultation ends on September 06, 2019.

APRA had issued the first consultation on revisions to the capital framework for authorized deposit-taking institutions in February 2018. The package of proposed changes flows from the finalized Basel III reforms and from the Financial System Inquiry recommendation for the capital ratios of Australian authorized deposit-taking institutions to be "unquestionably strong." APRA has published its Response Paper post the end of the consultation period and the receipt of 18 responses from the industry participants. The Response Paper details revised capital requirements for residential mortgages, credit risk and operational risk requirements under the standardized approaches, and a simplified capital framework for small, less complex authorized deposit-taking institutions. After taking into account the industry feedback and the findings of a quantitative impact study, APRA is proposing to revise some of its initial proposals, including: 

  • For residential mortgages, some narrowing in the capital difference that applies to lower risk owner-occupied, principal-and-interest mortgages and all other mortgages
  • More granular risk-weight buckets and the recognition of additional types of collateral for SME lending, as recommended by the Productivity Commission in its report on Competition in the Financial System
  • Lower risk-weights for credit cards and personal loans secured by vehicles

Other measures proposed in the February 2018 Discussion Paper, as well as improvements to the transparency, comparability, and flexibility of the capital framework, will be consulted on in a subsequent response paper that is due to be released in the second half of 2019. The latest proposals do not, at this stage, make any change to the Level 1 risk-weight for authorized deposit-taking institutions’ equity investments in subsidiary authorized deposit-taking institutions. This issue has been raised by stakeholders in response to proposed changes to the capital adequacy framework in New Zealand. APRA has been actively engaging with RBNZ on this issue and any change to the current approach will be consulted on as part of APRA’s review of Prudential Standard APS 111 Capital Adequacy: Measurement of Capital later this year.   

The APRA consultation on revisions to the authorized deposit-taking institution capital framework is a multi-year project. APRA expects to conduct one further round of consultation on the draft prudential standards for credit risk prior to their finalization. The final rules are intended to come into effect from January 01, 2022, in line with the internationally agreed implementation date of BCBS. An exception is the operational risk capital proposal for authorized deposit-taking institutions, which uses advanced models; APRA is proposing these new requirements be implemented earlier, from January 01, 2021.

 

Related Links

Comment Due Date: September 06, 2019

Effective Date: January 01, 2022 (expected)

Keywords: Asia Pacific, Australia, Banking, Basel III, Capital Adequacy Framework, Credit Risk, Operational Risk, Standardized Approach, IRB Approach, Standardized Measurement Approach, APS 112, APS 113, APS 115, Responses to Consultation, Proportionality, APRA

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