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    APRA Finalizes Capital Adequacy Standards for Banks

    November 29, 2021

    The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks. Accompanying these are the updated prudential standards for capital adequacy and credit risk capital—that is, APS 110 on capital adequacy, APS 112 on the standardized approach to credit risk, and APS 113 on the internal ratings-based approach to credit risk; these standards will come into effect from January 01, 2023. APRA also launched a consultation on the guidance for these prudential standards to assist banks to prepare for the new framework, with the consultation period ending on March 11, 2022. APRA plans to update the associated reporting requirements and other related prudential standards in the year ahead.

    Within the new framework, APRA has introduced a set of simplified capital requirements that can be applied to small, less complex banks (those with under $20 billion in assets and simple business models). The Basel framework has been developed primarily for large, internationally active banks and, while widely used worldwide, the cost of implementing the full framework for small banks may outweigh the benefits of prudential safety in doing so. The development of a simplified approach for smaller banks avoids unnecessary regulatory burden, without jeopardizing prudential safety, and is expected to benefit about three-quarters of domestic banks. The new framework will strengthen financial resilience by:

    • ensuring existing high levels of capital adequacy are maintained
    • providing more flexibility and responsiveness to risks in the operating environment
    • being more risk-sensitive, through increasing capital requirements for higher risk lending and decreasing it for lower risks
    • supporting competition by limiting differences in capital requirements between smaller and larger banks
    • improving the comparability of bank capital ratios, both domestically and with global peers
    • reducing operational burden for smaller banks

    The framework introduces significant increase in flexibility, with the capital conservation buffer (CCB) of 3.5% for standardized banks and 5.75% for the major banks. This includes a 1.0% default setting for the countercyclical capital buffer (CCyB). Additional safeguards were built into the framework in the form of better risk-sensitivity in the standardized approach and higher buffers and floors for advanced banks. APRA expects that all banks will ensure that they are ready to meet the minimum standards, when they commence, and seek to implement better practice in capital management in line with the intent of the reforms. This includes setting prudent capital targets with an adequate management buffer, updating capital projections and internal capital adequacy assessment processes (ICAAPs), and conducting stress testing on the new basis.

     

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    Effective Date: January 01, 2023

    Comment Due Date: March 11, 2022 (Guidance)

    Keywords: Asia Pacific, Australia, Banking, Regulatory Capital, Basel, Credit Risk, Guidance, APS 110, APS 112, APS 113, Standardized Approach, IRB Approach, Proportionality, APRA

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