APRA on Interim Capital Treatment of Equity Investment in Subsidiaries
APRA issued a letter to all authorized deposit-taking institutions to advise of an interim change to the capital treatment of new or additional equity investments in banking and insurance subsidiaries. The planned finalization and implementation of the prudential standard APS 111 on "Capital Adequacy: Measurement of Capital" are now likely to be in 2021 and 2022, respectively; however, it is important that any new or additional equity investments made before then are undertaken with the proposed policy in mind. In the interim period, authorized deposit-taking institutions will be expected to notify APRA ahead of any new or additional equity investments in banking and insurance subsidiaries, which would result in the aggregate value of any investment exceeding 10% of the Common Equity Tier (CET)1 capital of an authorized deposit-taking institution.
In October 2019, APRA had launched a consultation outlining planned revisions to the prudential standard APS 111. The most significant proposal in this set of revisions was an adjustment to the capital treatment of authorized deposit-taking institutions’ equity investments in banking and insurance subsidiaries. In the interim period, there will be no change to the capital treatment of any existing equity investments in the banking and insurance subsidiaries, with these exposures continued to be risk-weighted at 300% if listed or 400% if unlisted. However, until the new APS 111 is finalized and implemented, APRA will require any new or additional equity investments in banking and insurance subsidiaries, where the amount of that new or additional investments takes the aggregate value of the investment above 10% of an authorized deposit-taking institutions CET1 capital, to be fully funded by equity capital at the authorized deposit-taking institution parent company level.
This interim measure reflects the direction of the proposed APS 111, but does not impact existing investments. It also does not restrict or prohibit authorized deposit-taking institutions from making new investments or increasing their existing investments in banking and insurance subsidiaries in the period ahead. However, it will ensure that any new or additional equity investments, particularly where the aggregate value of the investment is large relative to the authorized deposit-taking institutions' CET1 capital, are backed by appropriate capital to reduce the risk to Australian depositors.
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Keywords: Asia Pacific, Australia, Banking, Insurance, APS 111, Capital Adequacy, Equity Investment, Basel, Regulatory Capital, APRA
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