APRA is proposing to update its prudential standard on credit risk management requirements for authorized deposit-taking institutions. To this end, APRA released a discussion paper proposing changes to the Prudential Standard APS 220 Credit Quality (APS 220), which requires authorized deposit-taking institutions to control credit risk by adopting prudent credit risk management policies and procedures. APRA is proposing to rename APS 220 as Prudential Standard APS 220 Credit Risk Management (the revised APS 220) to better describe the purpose of the revised standard. APRA intends to implement the proposed reforms to APS 220 from July 01, 2020.
The discussion paper outlines the proposals of APRA in the following areas:
- Credit risk management—The revised APS 220 broadens coverage to include credit standards and the ongoing monitoring and management of an authorized deposit-taking institution’s credit portfolio in more detail. It also incorporates enhanced Board oversight of credit risk and the need for authorized deposit-taking institutions to maintain prudent credit risk practices over the credit life-cycle.
- Credit standards—The revised APS 220 incorporates outcomes from APRA's recent supervisory focus on credit standards and addresses recommendations from the Final Report of the Royal Commission in relation to the valuation of land taken as collateral by the authorized deposit-taking institutions.
- Asset classification and provisioning—The revised APS 220 provides a more consistent classification of credit exposures, by aligning recent accounting standard changes on loan provisioning requirements (under AASB 9), as well as other guidance on credit-related matters of BCBS.
Since 2006, when APS 220 was substantially updated, credit risk practices have significantly evolved, with the emergence of more sophisticated analytical techniques and information systems. Consequently, APRA is planning to modernize the standard. An accompanying prudential practice guide and revised reporting standards will be released for consultation later in 2019. APRA expects that the final prudential standard, prudential practice guide, and reporting standards will be released by the end of 2019.
Effective Date: July 01, 2020 (Proposed)
Keywords: Asia Pacific, Australia, Banking, Credit Risk Management, APS 220, Credit Risk, AASB 9, IFRS 9, APRA
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