APRA Sets LAC for D-SIBs, Proposes to Enhance Crisis Preparedness
The Australian Prudential Regulation Authority (APRA) issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900). The discussion paper sets out rationale for the proposed standards, which are intended to strengthen crisis preparedness across banks, insurers, and superannuation trustees. The consultation period on these prudential standards ends on April 29, 2022, with APRA proposing for the new prudential standards to come into force from January 01, 2024. APRA also plans to consult on supporting guidance material for these standards in 2022.
The following are the key highlights of the proposals:
- CPS 190 on financial contingency planning. This proposed standard introduces requirements for the regulated entities to develop contingency plans to respond to financial stress by either recovering their financial resilience or exiting regulated activities in an orderly manner. The key elements of the proposed standard include developing a financial contingency plan, maintaining capabilities to execute the financial contingency plan, and regularly reviewing the contingency plans. Under the proposed CPS 190, larger or more complex entities would be subject to heightened requirements, whereas smaller, less complex entities will have fewer and simpler requirements. Smaller or less complex entities will likely focus their efforts on a smaller range of credible contingency options, which reduces the planning required to achieve a prudent level of crisis preparedness.
- CPS 900 on resolution planning. This proposed standard requires large or complex entities, or those that provide critical functions to the economy, to be prepared for resolution to minimize the impact on the community and the financial system. The proposed standard has been designed to embed the APRA approach to loss-absorbing capacity within the prudential framework for resolution planning and is thus being published along with the letter conveying the loss-absorbing capacity requirements. The key elements of the proposed CPS 900 include assessing feasibility of resolution options, implementing pre-positioning steps necessary for the execution of the resolution plan, and maintaining capabilities to support the plan. The proposed CPS 900 will only apply to the significant financial institutions or entities that are involved in the critical functions to the economy. As part of the proposal, APRA may impose obligations on these entities to support resolution planning, including requirements to maintain additional loss-absorbing capacity. APRA would determine such obligations as part of its resolution planning for individual entities.
In its letter on the finalized loss-absorbing capacity requirement for D-SIBs, APRA informs the D-SIBs that this requirement will be set as an increase to minimum total capital requirements of 4.5 percentage points of risk-weighted assets on a Basel III basis. The requirements are for the four major banks that have been designated as D-SIBS and will come into effect from January 01, 2026. APRA also specified the minimum total capital requirement that will apply to a D-SIB from 2026: the minimum total capital requirement, including regulatory buffers, will be 18.25%, inclusive of the additional loss-absorbing capacity and other changes from the broader capital reforms for authorized deposit-taking institutions. APRA does not expect the increase in capital requirement that is applicable from 2026 to have a material impact on market capacity for Tier 2 capital instruments. D-SIBs have already met the bulk of the required increase, given their progress in meeting the interim requirement. The interim setting was an increase in the minimum total capital requirement for the D-SIBs of three percentage points of risk-weighted assets, to be met by January 2024. D-SIBs have already met this level and issued more than AUD 50 billion of Tier 2 capital in recent years. APRA anticipates that D-SIBs may issue a further AUD 20 billion of Tier 2 capital, in aggregate, to meet their final requirement.
Related Links
Comment Due Date: April 29, 2022 (Proposed Standards)
Effective Date: January 01, 2024 (Proposed Date for Standards)
Keywords: Asia Pacific, Australia, Banking, Contingency Planning, Resolution Planning, CPS 190, CPS 900, Resolution Framework, D-SIB, Loss Absorbing Capacity, Regulatory Capital, Basel, Tier 2 Capital, TLAC, Crisis Management Framework, 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.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.