APRA updated the prudential standard on credit risk management requirements (APS 220) for authorized deposit-taking institutions, post a public consultation. APRA also published its response to the submissions received on the consultation for APS 220. The revised APS 220 will come into effect from January 01, 2021. In addition, APRA released, for consultation, a draft Prudential Practice Guide on credit risk management (APG 220). The draft guide is intended to complement the prudential standard and offers guidance on APRA’s view of sound practices in the area of credit risk management for authorized deposit-taking institutions. The consultation on APG 220 closes on March 12, 2020.
Overall, APS 220 sets out the requirements for an authorized deposit-taking institution to implement a credit risk management framework that is appropriate to its size, business mix, and complexity. As flagged, APRA has renamed the standard APS 220 Credit Risk Management. APG 220 requires an authorized deposit-taking institution to maintain:
- An appropriate credit risk appetite statement and credit risk management strategy that reflects its credit risk appetite and credit risk profile
- Prudent policies and processes to identify, measure, monitor, report, and control or mitigate credit risk over the full credit life-cycle
- Sound credit assessment and approval criteria, including for the comprehensive assessment of a borrower’s repayment capacity
- An appropriate system for the ongoing administration of its credit portfolio
- Prudent policies and processes for the early identification and management of problem exposures, including non-performing and restructured exposures and other transactions
- Appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate provisions in accordance with the stated policies and processes of an authorized deposit-taking institution and the Australian Accounting Standards
In a response to the submissions paper, APRA confirmed that the finalized prudential standard has broadened its coverage to include credit standards, consistent with recent update of the Australian Securities and Investments Commission to its responsible lending guidance, and the ongoing monitoring and management of the credit portfolio of an authorized institution in more detail. It also incorporates enhanced board oversight of credit risk and the need for authorized deposit-taking institutions to maintain prudent credit risk practices over the entire credit life-cycle. APRA has amended APS 220 to require independent valuation of collateral, for the valuation to take into account the time taken for realization of collateral and, to the extent possible, the likelihood of external events such as drought and flood. The revised APS 220 also provides a more consistent classification of credit exposures, by aligning recent accounting standard changes on loan provisioning requirements as well as other guidance on credit related matters of the BCBS.
Comment Due Date: March 12, 2020 (APG)
Effective Date: January 01, 2021 (APS)
Keywords: Asia Pacific, Australia, Banking, Credit Risk, Proportionality, APS 220, APG 220, IFRS 9, AASB 9, Outsourcing, APRA
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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