APRA has released, for consultation, a response letter and the draft prudential standard on leverage ratio requirement for authorized deposit-taking institutions. The letter sets out response of APRA to the November 2018 consultation and proposes further amendments to incorporate recent technical changes to the Basel Committee leverage ratio standard. The proposals outlined in this letter relate solely to the leverage ratio requirement for authorized deposit-taking institutions that apply the internal ratings-based (IRB) approach to credit risk. In this context, APRA has published both the clean and marked up draft versions of the prudential standard APS 110 on Capital Adequacy, which includes leverage ratio requirements. The consultation period ends on February 07, 2020 and APRA intends to finalize the leverage ratio proposals by the end of 2020.
In the draft APS 110, APRA is proposing to adopt the revised treatment for client-cleared derivatives, which the Basel Committee introduced most recently. Subsequent to the November 2018 consultation, the Basel Committee finalized revisions to its leverage ratio disclosure requirements to address window-dressing concerns. These revisions require that banks calculate daily average values for securities financing transactions only; all other components of the leverage ratio are calculated as at quarter-end. APRA is proposing to align with the Basel Committee’s revised disclosure requirements and limit the calculation of daily average values to securities financing transaction exposures. A revised leverage ratio reporting standard reflecting this requirement will be released when APRA consults more broadly on changes to reporting standards in 2020.
Furthermore, in response to the comments received on an earlier consultation, APRA will now allow IRB institutions to adopt the modified standardized approach for measuring counterparty credit risk exposures (SA-CCR) early for their leverage ratio disclosures under the prudential standard APS 330 on Public Disclosure. IRB institutions that intend to adopt the modified SA-CCR early will need to seek prior approval from APRA. For this purpose, an authorized deposit-taking institution must provide APRA with an outline of the implementation process and testing conducted to ensure that the early adoption of modified SA-CCR has been implemented correctly. The authorized deposit-taking institution must also provide a waterfall of its leverage ratio exposure measure calculation using the modified SA-CCR that can be reconciled against its SA-CCR calculations under the risk-based capital framework. Where APRA is satisfied with the implementation, it will provide the institution with written approval to adopt modified SA-CCR early. The IRB institutions that adopt early will be required to state that they are using modified SA-CCR in their public disclosures. This is a transitional issue that will be resolved from January 01, 2022, at which time all IRB institutions will be required to use modified SA-CCR to meet both the minimum capital and public disclosure leverage ratio requirements.
APRA initially consulted on the introduction of a leverage ratio requirement for authorized deposit-taking institutions in February 2018 and subsequently consulted on a draft prudential standard APS 110 on Capital Adequacy and a draft reporting standard ARS 110.1 on Leverage Ratio in November 2018. APRA had received five submissions in response to the November 2018 consultation and the non-confidential submissions have been published. APRA had proposed that IRB authorized deposit-taking institutions report their leverage ratios to APRA calculated on the basis of a daily average of all exposure measure components. Respondents were not supportive of this proposal, stating that calculating all components on a daily basis would be difficult to operationalize and introduced a disproportionate regulatory burden relative to the stated aims of the leverage ratio as a backstop measure. Respondents requested that APRA either retain the status quo (that is, reporting as at quarter-end only) or adopt a monthly average measure, in line with the financial accounting reporting requirements.
Comment Due Date: February 07, 2020
Keywords: Asia Pacific, Australia, Banking, Reporting, Leverage Ratio, APS 110, SA-CCR, Counterparty Credit Risk, Capital Adequacy, Basel III, Securities Financing Transactions, APRA
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