Last week, APRA released a consultation draft aimed at reducing “contagion risk”. Banks would be required to limit their exposures to unrelated counterparties to 25 per cent of Tier 1 Capital and 15 per cent of Tier 1 Capital to exposures to a bank designated as a global systemically important bank. This would bring Australian banks into line with Basel recommendations.
The Australian Prudential Regulation Authority (APRA) has today released for consultation a discussion paper setting out proposed revisions to its prudential framework on large exposures for authorised deposit-taking institutions (ADIs).
APRA’s large exposure framework aims to limit the impact of losses when a counterparty defaults, and restrict contagion risk from spreading across the financial system.
The proposed revisions are intended to strengthen the supervisory framework for large exposures, reduce system-wide contagion risk and maintain an alignment to the Basel Committee on Banking Supervision’s large exposures standards.
The consultation package released today includes a draft revised Prudential Standard APS 221 Large Exposures (APS 221), as well as associated reporting standards, reporting forms and reporting form instructions.
The discussion paper proposes revisions to large exposure requirements, including that:
- the limit to an unrelated ADI and their subsidiaries be reduced from 50 per cent of Total Capital to 25 per cent of Tier 1 Capital;
- a new limit of 15 per cent of Tier 1 Capital be applied to exposures to a bank designated as a global systemically important bank, and to exposures between banks designated by APRA as domestic systemically important banks; and
- new criteria apply to identifying a group of connected counterparties and measuring large exposure values.
APRA invites written submissions on the proposals in the discussion paper by Wednesday 5 July 2017.
APRA expects to release a response paper and its final revised APS 221 and associated reporting package in the second half of 2017.
APRA’s intention is that the revised large exposure requirements will come into effect from 1 January 2019, in line with the internationally-agreed timetable.
