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    APRA Publishes FAQ on Treatment of Certain Residential Mortgage Loans

    June 28, 2021

    APRA published a frequently asked question (FAQ) for authorized deposit-taking institutions on the regulatory capital treatment of loans issued under the federal government’s Family Home Guarantee (FHG) and First Home Loan Deposit Scheme (FHLDS) programs. The clarifications provided in the FAQ are relevant mainly for the authorized deposit-taking institutions that use the standardized approach to credit risk. The FAQ also clarifies the correct reporting approach for entities that use the standardized approach to credit risk under the reporting standard ARS 112.1 on on-balance sheet assets under the standardized credit risk approach the reporting standard ARS 223.0 on residential mortgage lending.

    Under the standardized approach to credit risk, loans subject to the FHG and FHLDS may be treated in a comparable manner to the residential mortgage loans with a loan-to-valuation ratio 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 the 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 FHG or FHLDS.

     

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    Keywords: Asia Pacific, Australia, Banking, Credit Risk, Residential Mortgage, FHG, FHLDS, Regulatory Capital, Standardized Approach, Internal Ratings Based Approach, APS 112, APS 223.0, APRA

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