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    APRA Clarifies Prudential Treatment of Residential Mortgage Loans

    June 24, 2022

    The Australian Prudential Regulation Authority (APRA) updated the answer to a frequently asked question (FAQ) on the treatment of loans issued under the Family Home Guarantee (FHG) and First Home Loan Deposit Scheme (FHLDS) programs of the government.

    APRA has clarified that loans extended under the government’s expanded Home Guarantee Scheme, which was announced on March 28 2022, will be subject to the same regulatory treatment as previous tranches. Under the standardized approach to credit risk, loans subject to the Home Guarantee Scheme may be treated in a comparable manner to residential mortgage loans with a loan-to-valuation ratio (LVR) of 80% and accordingly risk-weighted at 35%. This risk-weight must be applied to the total amount lent to the borrower. This risk-weight reflects the government guarantee and terms of the program. Once the government guarantee ceases to apply, authorized deposit-taking institutions must revert to calculating the regulatory capital requirement in line with the existing requirements of prudential standard APS 112 on standardized approach to credit risk. For authorized deposit-taking institutions that use the internal ratings-based approach to credit risk, there are no adjustments to the capital treatment of loans subject to the Home Guarantee Scheme. This treatment will also be applicable to the new prudential standard APS 112 capital adequacy: standardized approach to credit risk, which comes into effect on January 01, 2023.

     

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    Keywords: Asia Pacific, Australia, Banking, Basel, Credit Risk, Residential Mortgage, Lending, Regulatory Capital, Standardized Approach, Internal Ratings Based Approach, APS 112, FHG, FHLDS, FAQ, APRA

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