APRA Revises Prudential Standard on Capital Adequacy
The Australian Prudential Regulation Authority (APRA) published the final prudential standard APS 111, which sets out detailed criteria for measuring the regulatory capital of an authorized deposit-taking institution. APRA also outlined the steps taken in finalizing the revised APS 111, including an assessment of the regulatory impact. 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. APRA also published its response to the submissions received to the May 2021 consultation on APS 111. The final revised APS 111 will come into effect from January 01, 2022.
APRA had proposed some new minor revisions to APS 111 in May 2021. These revisions clarified that Common Equity Tier 1 capital would not be permitted to have unusual features that could undermine its role as the highest quality loss-absorbing capital, in line with the approach for other capital instruments. Submissions from industry did not raise concerns regarding this proposal. However, some authorized deposit-taking institutions did request APRA to provide further clarity regarding "repackaging" arrangements and the applicability of the revised prudential standard to foreign bank branches. APRA has clarified that APS 111 does not apply to a foreign authorized deposit-taking institution. As part of APRA’s approach to licensing, APRA will typically review whether foreign institutions are subject to comparable capital requirements in their home country. The key revisions in this update of the Prudential Standard are designed to:
- reinforce financial system resilience, through changes to the capital treatment of an institution's equity investments in their banking and insurance subsidiaries
- promote simple and transparent capital issuance, through the removal of the allowance for the use of special purpose vehicles in regulatory capital issuance
- clarify aspects of APS 111, including provision of additional technical information to assist institutions in issuing capital instruments
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Effective Date: January 01, 2022
Keywords: Asia Pacific, Australia, Banking, APS 111, Capital Adequacy, Regulatory Capital, Basel, APRA
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