APRA proposed changes to APS 111, which is the prudential standard on measuring capital adequacy and establishes the criteria for regulatory capital requirements of authorized deposit-taking institutions. This proposal is part of the review of the capital treatment of authorized deposit-taking institutions’ investments in their banking and insurance subsidiaries. The review was initiated to update the relevant prudential standard and ensure that the appropriate capital treatment is applied to investments in subsidiaries. APRA intends to finalize changes to APS 111 after the consultation period closes on January 31, 2020. The updated prudential standard is expected to come into force from January 01, 2021. APRA is open to working with impacted authorized deposit-taking institutions on the appropriate transition.
The review was prompted in part by the recent proposals of RBNZ to materially increase capital requirements in New Zealand. The RBNZ proposal would impact major banks in Australia, which are the owners of the four largest banks in New Zealand. These proposals will in effect increase the amount of equity required to support investments in large subsidiaries while reducing this requirement for small subsidiaries. The proposal seeks to balance the benefits of revenue diversification that banks can achieve by owning subsidiary operations against the potential concentration risk that arises as these investments increase in size.
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 on both a Level 1 and Level 2 basis. In the consultation paper, APRA proposed the following:
- Increasing the capital an authorized deposit-taking institution must hold to offset concentrated exposures to foreign or domestic banking or insurance subsidiaries
- Reducing the capital an authorized deposit-taking institution must hold to offset smaller exposures to banking or insurance subsidiaries
- Incorporating into the prudential standard various rulings and technical information APRA has published since APS 111 was last substantially updated in 2013
- Aligning APS 111 with the updated guidance from BCBS
APRA is not proposing a full dollar-for-dollar capital requirement for an authorized deposit-taking institutions' equity investments in these subsidiaries; this is in recognition of the benefits of subsidiaries that are subject to prudential regulation and considering that ownership of banking and insurance subsidiaries generally provides some beneficial diversification. However, as these exposures increase in size, the concentration risk associated with such investments start to outweigh the diversification benefits. Requiring dollar-for-dollar capital for amounts above the 10% common equity tier 1, or CET1, capital reduces the risks of increasing levels of these exposures, for Australian depositors.
Comment Due Date: January 31, 2020
Effective Date: January 01, 2021 (expected)
Keywords: Asia Pacific, Australia, New Zealand, Banking, Insurance, APS 111, Capital Adequacy, CET 1, RBNZ, APRA
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