APRA Clarifies Property Revaluation Under Capital Adequacy Standard
APRA published a frequently asked question (FAQ) that provides clarification to the authorized deposit-taking institutions in determining their capital requirements under the prudential standard on the standardized approach to credit risk (APS 112). APS 112 requires an institution to revalue property offered as security for residential mortgages when it becomes aware of a material change in the value of property in an area or region. APRA is confirming that, consistent with its future intention of removing this requirement from the authorized deposit-taking institution capital framework, institutions utilizing the standardized approach to credit risk will not be expected to revalue residential mortgage property for meeting the requirements of APS 112. This applies with immediate effect.
The authorized deposit-taking institutions are currently required to revalue property used as security for residential mortgage exposures for the purposes of measuring regulatory capital, when they become aware of a material change in the value of property in an area or region. This is a requirement in APS 112 Attachment C, paragraph 6. Earlier, APRA has proposed to remove this requirement as part of broader revisions to the prudential standards on regulatory capital. This was foreshadowed in the consultation on revisions to the capital framework in June 2019. The rationale for this change in part recognized that the calibration of the residential mortgage risk-weights in APS 112 already includes an allowance for increases in the risk of residential mortgage exposures, including from house price movements. Additional movements in risk-weights from the revaluation of residential mortgage properties have the potential to be excessively pro-cyclical in amplifying the capital requirements of authorized deposit-taking institutions. Given these considerations and the intention to remove the revaluation requirement, APRA is clarifying that authorized deposit-taking institutions will not be expected to revalue residential mortgage properties for the purpose of meeting APS 112 Attachment C, paragraph 6. The authorized deposit-taking institutions may, however, consider it appropriate to continue to conduct revaluations for broader risk management and other purposes and nothing in this FAQ is intended to discourage authorized deposit-taking institutions from doing so where they consider it prudent.
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Keywords: Asia Pacific, Australia, Banking, Basel, Regulatory Capital, Credit Risk, Standardized Approach, APS 112, Residential Real Estate, FAQ, APRA
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