APRA Finalizes Prudential Guide on Credit Risk Management
The Australian Prudential Regulation Authority (APRA) published the final version of APG 220, the prudential practice guide on credit risk management. The guide is intended to assist authorized deposit-taking institutions in making prudent lending decisions and meeting requirements under the APS 220, the new prudential standard on credit risk management. APG 220 incorporates examples of better practices that APRA has identified in the recent supervisory reviews. APG 220 has been published in advance of finalizing the prudential standard to assist authorized deposit-taking institutions in meeting their requirements and in response to the industry feedback that earlier sight of the final guidance would support implementation.
APRA had launched a consultation on a APG 220 in December 2019, to which it received four submissions from authorized deposit-taking institutions and industry associations. In response to the feedback received, APRA has provided further clarity regarding its expectations for:
- the role of the Board in managing credit risk, aligning with the requirements in APS 220
- sound credit assessment and approval processes, including providing examples where some additional flexibility could be considered prudent
- the use of automated valuation methods, including examples for the prudent development of scorecards and use of risk controls.
Then, in December 2020, APRA had consulted on potential changes to the new APS 220, which would be contingent on the government’s proposed changes to consumer credit laws passing as legislation. These included:
- A drafting amendment that would require authorized deposit-taking institutions to assess an individual borrower’s repayment capacity without substantial hardship.
- Closer alignment between the implementation date of the government’s proposed consumer credit reforms and the new APS 220. APRA remains committed to ensuring there is appropriate alignment between the new authorized deposit-taking institutions and non-authorized deposit-taking institutions lenders’ regimes. The new APS 220 will be implemented on January 01, 2022, or earlier if the government’s proposed reforms are passed as legislation. In this event, APRA will provide an update to authorized deposit-taking institutions at the time.
APRA expects that prudent authorized deposit-taking institutions would already be meeting the requirements of the new APS 220. Given the focus on reinforcing sound lending practices amid the current risk outlook, APRA would be concerned if authorized deposit-taking institutions were not already meeting the core requirements for prudent loan origination standards. In the current environment, APRA expects Boards to have a strong focus on credit risk management, particularly for residential mortgage lending. APG 220 sets out examples of better practices to assist authorized deposit-taking institutions in maintaining sound lending practices and managing their credit risk, including during periods of heightened risk. It would be prudent for authorized deposit-taking institutions to closely review the examples of better practice in APG 220 against their current credit risk management practices, and make changes where appropriate.
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Keywords: Asia Pacific, Australia, Banking, APG 220, APS 220, Credit Risk, Regulatory Capital, Loan Origination, Lending, APRA
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