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    APRA Issues Guide on Contingent Liquidity and FAQs on Operational Risk

    November 17, 2021

    The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) on operational risk capital for authorized deposit-taking institutions. The FAQs provide information to assist regulated entities to interpret prudential and reporting standards (APS 115 and ARS 115.0) on standardized measurement approach to operational risk (APS 115). Additionally, APRA released a letter on its final guidance (APG 120) for locally incorporated authorized deposit-taking institutions subject to the liquidity coverage ratio (LCR) requirements to maintain contingent liquidity through self-securitized assets on an ongoing basis.

    APRA had, in July 2021, advised its intention to de-link its guidance for self-securitized assets from the Committed Liquidity Facility (CLF) and released, for consultation, its proposed updated guidance. The proposed guidance stated that it would be prudent for a locally incorporated authorized deposit-taking institution subject to LCR requirements to hold self-securitized assets with a cash value equivalent to at least 30% of group net cash outflows as contingency for periods of stress. APRA received seven submissions that expressed support for the need to maintain contingent liquidity reserves for periods of stress. In response to the comments, APRA has amended the draft guidance as follows:

    • For a locally incorporated authorized deposit-taking institutions subject to LCR requirements, it would be prudent to hold self-securitized assets with a cash value equivalent to at least 30% of AUD net cash outflows as contingency for periods of stress. APRA would expect the self-securitized assets to be unencumbered and not held as collateral for any other purpose.
    • Using a twelve-month average of net cash outflows would reduce the volatility in the level of self-securitized assets that would be held. 

    APRA will replace APG 210 paragraph 67 with the above guidance and expects to release the updated version of APG 210 on March 01, 2022. APRA expects authorized deposit-taking institutions to report to the Reserve Bank of Australia, on an ongoing basis, the relevant data on the self-securitized assets held to meet the guidance. In addition, the APRA letter specifies that footnote 5 and Attachment B paragraph 5(e) of prudential standard on securitization (APS 120) outline when an authorized deposit-taking institution may repurchase exposures from a self-securitization. APRA will not take action under APS 120 as a result of authorized deposit-taking institutions reducing the size of their self-securitized assets in line with the final guidance. However, if an authorized deposit-taking institution is reducing the size of its self-securitized assets for other reasons, it should consult APRA.

     

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    Keywords: Asia Pacific, Australia, Banking, FAQ, Operational Risk, Reporting, APG 210, APS 210, Liquidity Risk, LCR, Self-Securitized Assets, APRA

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