August 14, 2018

APRA published a discussion paper that outlines the potential approaches to adjust the capital framework for authorized deposit-taking institutions to make capital ratios more transparent, comparable, and flexible. These approaches focus on amending disclosure requirements and the way in which institutions would be required to calculate and report capital ratios, without altering the quantum and risk-sensitivity of capital requirements. Written submissions must be sent by November 02, 2018.

The approaches would not change the amount of capital authorized deposit-taking institutions are required to hold beyond the unquestionably strong capital benchmarks announced in July 2017. Rather, APRA is considering whether to alter the way authorized deposit-taking institutions’ capital requirements are calculated and disclosed to facilitate greater domestic and international comparability and transparency of capital strength. The discussion paper outlines two general approaches designed to aid authorized deposit-taking institutions in representing and communicating their capital strength:

  • Under the first approach, authorized deposit-taking institutions would continue using existing definitions of capital and risk-weighted assets, but APRA would develop a methodology allowing them to improve the credibility and robustness of internationally comparable capital ratio disclosures
  • Under a second approach, APRA would change the way authorized deposit-taking institutions calculate capital ratios to instead use more internationally harmonized definitions of capital and risk-weighted assets. To maintain the strength and risk-sensitivity of the capital framework, there would need to be corresponding increases in minimum ratio and/or capital buffer requirements.

The discussion paper also proposes measures to make the capital framework more flexible in times of stress, including by increasing the size of regulatory capital buffers relative to minimum regulatory capital requirements. APRA is open to considering these approaches independently or in combination, or indeed retaining its current methodology, and is seeking industry feedback on whether the benefits of the suggested approaches outweigh the regulatory burden and associated increase in complexity. APRA intends to consult on draft revised prudential standards incorporating the outcome of this consultation in 2019. APRA expects that final prudential standards would be released by mid-2020. In finalizing the revised capital framework, APRA will have regard to the Basel III implementation timetable. However, as indicated in the February 2018 Discussion Paper, it is likely that the revised prudential requirements would commence from January 01, 2021

 

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Comment Due Date: November 02, 2018

Keywords: Asia Pacific, Banking, Capital Framework, Basel III, Regulatory Capital, Disclosures, APRA

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