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    APRA Publishes FAQs on Capital Treatment of Overseas Subsidiaries

    September 15, 2021

    The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries. The FAQs are relevant for authorized deposit-taking institutions that hold these investments via holding companies. Through this set of FAQs, APRA confirmed that institutions can use the indirect equity investment provisions in APS 111, the prudential standard on capital adequacy (the January 01, 2022 version of the standard), to determine the capital treatment for these exposures.

    In the FAQs, APRA clarified the method for calculating the amount of capital institutions need to hold against their exposures to overseas deposit-taking and insurance subsidiaries that are held through non-operating holding companies for capital purposes, at Level 1. The amount of capital to be held by an authorized deposit-taking institution against its equity investments in overseas deposit-taking and insurance subsidiaries may, at Level 1, be determined using the "look-through" method in APS 111. An authorized deposit-taking institution may treat the underlying investments in its overseas banking and insurance subsidiaries as indirect equity exposures. APRA considers that indirect equity exposures represent exposures that will result in a loss to the institution that is substantially equivalent to any loss in the direct holding. Therefore, an authorized deposit-taking institution, may, if the overseas deposit-taking or insurance subsidiary meets these criteria, use the concessional approach in paragraph 9(f). APRA expects an authorized deposit-taking institution wishing to use this approach in respect of an offshore deposit-taking or insurance subsidiary to notify APRA.

    APRA also clarified differences in the treatment of equity and debt exposures to overseas deposit-taking and insurance subsidiaries held through non-operating holding companies for capital purposes at Level 1. APRA expects that any debt provided to these non-operating holding companies, which funds equity or capital investments in overseas deposit-taking or insurance subsidiaries, will not be risk-weighted as debt. Instead, this debt will be included as part of the indirect equity exposure in the overseas deposit-taking or insurance subsidiary.

     

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    Keywords: Asia Pacific, Australia, Banking, Regulatory Capital, APS 111, Basel, Risk-Weighted Assets, FAQ, APRA

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