APRA Issues Proposal to Amend Leverage Ratio Requirement for Banks
APRA has released, for consultation, a response letter and the draft prudential standard on leverage ratio requirement for authorized deposit-taking institutions. The letter sets out response of APRA to the November 2018 consultation and proposes further amendments to incorporate recent technical changes to the Basel Committee leverage ratio standard. The proposals outlined in this letter relate solely to the leverage ratio requirement for authorized deposit-taking institutions that apply the internal ratings-based (IRB) approach to credit risk. In this context, APRA has published both the clean and marked up draft versions of the prudential standard APS 110 on Capital Adequacy, which includes leverage ratio requirements. The consultation period ends on February 07, 2020 and APRA intends to finalize the leverage ratio proposals by the end of 2020.
In the draft APS 110, APRA is proposing to adopt the revised treatment for client-cleared derivatives, which the Basel Committee introduced most recently. Subsequent to the November 2018 consultation, the Basel Committee finalized revisions to its leverage ratio disclosure requirements to address window-dressing concerns. These revisions require that banks calculate daily average values for securities financing transactions only; all other components of the leverage ratio are calculated as at quarter-end. APRA is proposing to align with the Basel Committee’s revised disclosure requirements and limit the calculation of daily average values to securities financing transaction exposures. A revised leverage ratio reporting standard reflecting this requirement will be released when APRA consults more broadly on changes to reporting standards in 2020.
Furthermore, in response to the comments received on an earlier consultation, APRA will now allow IRB institutions to adopt the modified standardized approach for measuring counterparty credit risk exposures (SA-CCR) early for their leverage ratio disclosures under the prudential standard APS 330 on Public Disclosure. IRB institutions that intend to adopt the modified SA-CCR early will need to seek prior approval from APRA. For this purpose, an authorized deposit-taking institution must provide APRA with an outline of the implementation process and testing conducted to ensure that the early adoption of modified SA-CCR has been implemented correctly. The authorized deposit-taking institution must also provide a waterfall of its leverage ratio exposure measure calculation using the modified SA-CCR that can be reconciled against its SA-CCR calculations under the risk-based capital framework. Where APRA is satisfied with the implementation, it will provide the institution with written approval to adopt modified SA-CCR early. The IRB institutions that adopt early will be required to state that they are using modified SA-CCR in their public disclosures. This is a transitional issue that will be resolved from January 01, 2022, at which time all IRB institutions will be required to use modified SA-CCR to meet both the minimum capital and public disclosure leverage ratio requirements.
APRA initially consulted on the introduction of a leverage ratio requirement for authorized deposit-taking institutions in February 2018 and subsequently consulted on a draft prudential standard APS 110 on Capital Adequacy and a draft reporting standard ARS 110.1 on Leverage Ratio in November 2018. APRA had received five submissions in response to the November 2018 consultation and the non-confidential submissions have been published. APRA had proposed that IRB authorized deposit-taking institutions report their leverage ratios to APRA calculated on the basis of a daily average of all exposure measure components. Respondents were not supportive of this proposal, stating that calculating all components on a daily basis would be difficult to operationalize and introduced a disproportionate regulatory burden relative to the stated aims of the leverage ratio as a backstop measure. Respondents requested that APRA either retain the status quo (that is, reporting as at quarter-end only) or adopt a monthly average measure, in line with the financial accounting reporting requirements.
Related Links
Comment Due Date: February 07, 2020
Keywords: Asia Pacific, Australia, Banking, Reporting, Leverage Ratio, APS 110, SA-CCR, Counterparty Credit Risk, Capital Adequacy, Basel III, Securities Financing Transactions, 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
Previous Article
IAIS Publishes Report on 2019 G-SII Identification ProcessRelated Articles
EU Agencies Update LCR Rule and Macro-Prudential Policy Recommendation
The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).
EBA Publishes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.
EIOPA Examines Physical Climate Risk Exposure, SII Non-Compliance
The European Insurance and Occupational Pensions Authority (EIOPA) published a report assessing insurers' exposure to physical climate change risks
EC Publishes Results on Review of Web Accessibility Directive
The European Commission (EC) published the results of a public consultation, held in October 2021, on the review of the Web Accessibility Directive.
NGFS Report Explores Quantification of Climate Risk Differentials
The Network for Greening the Financial System (NGFS) published two reports to aid central banks and regulators in their oversight of the financial sector and in their central bank operations
MAS Consults on Adjustment Spreads for Conversion of SOR Contracts
The Monetary Authority of Singapore (MAS) and the SC-STS are jointly consulting, until June 10, 2022, on setting adjustment spreads for the conversion of legacy SOR contracts to SORA reference rate.
OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
EBA Proposes Standards to Support Secondary NPL Markets
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
EBA Issues Standards for Crowdfunding Service Providers Under ECSPR
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.
