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.
Related Links
Keywords: Asia Pacific, Australia, Banking, APG 220, APS 220, Credit Risk, Regulatory Capital, Loan Origination, Lending, APRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Nick Jessop
Scenario modeling expert; risk management specialist; quantitative financial modeler
Related Articles
ISSB Sustainability Standards Expected to Become Global Baseline
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
IOSCO, BIS, and FSB to Intensify Focus on Decentralized Finance
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
BCBS Assesses NSFR and Large Exposures Rules in US
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.
Global Agencies Focus on ESG Data, Climate Litigation and Nature Risks
At the global level, supervisory efforts are increasingly focused on addressing climate risks via better quality data and innovative use of technologies such as generative artificial intelligence (AI) and blockchain.
ISSB Standards Shine Spotlight on Comparability of ESG Disclosures
The finalization of the IFRS sustainability disclosure standards in late June 2023 has brought to the forefront the themes of the harmonization of sustainability disclosures
EBA Issues Several Regulatory and Reporting Updates for Banks
The European Banking Authority (EBA) recently issued several regulatory publications impacting the banking sector.
BCBS Proposes to Revise Core Principles for Banking Supervision
The Basel Committee on Banking Supervision (BCBS) launched a consultation on revisions to the core principles for effective banking supervision, with the comment period ending on October 06, 2023.
US Proposes Final Basel Rules, Transition Period to Start in July 2025
The U.S. banking agencies (FDIC, FED, and OCC) recently proposed rules implementing the final Basel III reforms, also known as the Basel III Endgame.
FSB Report Outlines Next Steps for Climate Risk Roadmap
The Financial Stability Board (FSB) recently published the second annual progress report on the July 2021 roadmap to address climate-related financial risks.
EBA Plans on Ad-hoc ESG Data Collection and Climate Scenario Exercise
The recognition of climate change as a systemic risk to the global economy has further intensified regulatory and supervisory focus on monitoring of the environmental, social, and governance (ESG) risks.
