APRA Launches Second Consultation on IRRBB Framework in Australia

The draft APS 117 sets out the requirements that an authorized deposit-taking institution must meet in relation to interest rate risk in the banking book. The key requirements of this proposed prudential standard are that an institution must have a framework to manage, measure, and monitor interest rate risk in the banking book commensurate with the nature, scale, and complexity of its operations. Additionally, an authorized deposit-taking institutions must apply for approval from APRA to use an internal model for determining the capital charge for IRRBB, if it has sought or received approval from APRA to use an internal ratings-based approach (IRB) to credit risk. This consultation on the IRRBB framework is part of the APRA revisions to the capital framework for authorized deposit-taking institutions to implement "unquestionably strong" capital ratios and the Basel III reforms.

In response to the first consultation on the IRRBB framework that was launched in February 2018, APRA had received seven submissions from authorized deposit-taking institutions and industry associations. Respondents broadly supported the APRA proposal to maintain the internal modeling approach used to calculate the IRRBB capital charge, but raised some concerns in relation to standardizing various aspects of the internal modelling approach. In addition to the proposals consulted on in February 2018, APRA intends to make a number of other amendments to APS 117 to reflect the APRA implementation of the April 2016 Basel standard as well as other changes to strengthen the framework. Depending on the current modeling approach used by IRB institutions, increases in their IRRBB capital charge are expected to result from the proposals to:

• Require the use of a 97.5th percentile expected shortfall measure instead of a 99th percentile confidence interval using a value at risk methodology
• Require the use of absolute shocks for IRB institutions that currently use relative shocks in their IRRBB models
• Place constraints on the duration that an institution can apply to non-maturity deposits according to whether or not it is a core deposit

Related Links

• Proposed IRRBB Standard (PDF)
• APRA Response to First Consultation (PDF)
• Consultations on Capital Framework

Comment Due Date: December 06, 2019

Effective Date: January 01, 2022 (proposed)

Keywords: Asia Pacific, Australia, Banking, Basel III, IRRBB, Interest Rate Risk, IRB Approach, Capital Adequacy, APS 117, APRA