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    APRA Specifies Capital Treatment of Equity Investments in ABGF

    December 09, 2019

    APRA published a letter to the authorized deposit-taking institutions outlining the regulatory capital treatment of their equity investments in the Australian Business Growth Fund (ABGF). APRA is adjusting its capital framework for authorized deposit-taking institutions to support the establishment of the ABGF. The ABGF is a joint initiative between the Australian government and financial investors to provide longer term equity funding to small and medium-size enterprises (SMEs). APRA supports the establishment of the fund as an initiative to enhance financing options for SMEs.

    An authorized deposit-taking institution that invests in the ABGF will be able to apply a risk-weight of 250% to their investment. This compares to the current capital treatment of a full deduction from common equity tier 1 (CET1) capital for these investments. The inclusion of the Australian government as a founding shareholder in the ABGF supports APRA providing a special treatment, subject to prudential safeguards, for this investment compared to other equity investments. 

    To ensure that risks, to authorized deposit-taking institutions, of investing in the ABGF are contained, an authorized deposit-taking institution will only be able to invest up to 2% of its Level 1 CET1 Capital in the ABGF. Any additional equity investment beyond that amount will not be eligible for the 250% risk-weight and would be treated according to APRA’s usual prudential requirement of deduction from CET1 Capital. Where an authorized deposit-taking institution investor in the ABGF has an undrawn contractual commitment to invest in the ABGF, it may assign a 20% credit conversion factor to this commitment for capital adequacy purposes. An authorized deposit-taking institution must notify its Responsible Supervisor if it is participating in the ABGF.

     

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    Keywords: Asia Pacific, Australia, Banking, CET 1, Capital Framework, Regulatory Capital, Australian Business Growth Fund, Risk-Weighted Assets, Basel III, APRA

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