APRA published draft revisions to the prudential standard on capital adequacy measures (APS 111) for authorized deposit-taking institutions, along with its response to the submissions received for the 2019 consultation on the standard. APS 111 sets out the characteristics that an instrument must have to qualify as regulatory capital for an authorized deposit-taking institution and the various regulatory adjustments to be made to determine the total regulatory capital. The response paper sets out further revisions to the standard, the consultation period for which will end on June 10, 2021. APRA expects to finalize changes to APS 111 in July 2021, with the revised standard coming into force from January 01, 2022.
The most material change to APS 111 relates to the revised capital treatment of authorized deposit-taking institutions’ equity investments in their subsidiaries. This revision will, in effect, increase the amount of capital required to support equity investments in large subsidiaries and reduce the amount required for small subsidiaries. This change is not expected to increase system capital requirements, though the impact will differ across individual institutions. This proposed revision was consulted on in 2019 and is now being finalized. The revised draft standard contains additional minor revisions that were not included as part of the 2019 consultation. These revisions include measures to clarify that Common Equity Tier 1 (CET1) capital is not permitted to have any unusual features that could undermine its role as the highest quality loss-absorbing capital. APRA response paper also notes that, ahead of the implementation of the final revised APS 111, authorized deposit-taking institutions must continue to meet the interim expectations of APRA on the capital treatment of new or additional equity investments in banking and insurance subsidiaries; this was announced in November 2020 to ensure that any new or additional investments in subsidiaries align with the intended future state of APS 111.
Comment Due Date: June 10, 2021
Effective Date: January 01, 2022
Keywords: Asia Pacific, Australia, Banking, APS 111, Capital Adequacy, Regulatory Capital, Basel, RBNZ, APRA
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