The Australian Prudential Regulation Authority (APRA) has released for consultation a response letter and draft prudential standard on the leverage ratio requirement for authorised deposit-taking institutions (ADIs).
This consultation sets out APRA’s response to industry’s previous submissions and also incorporates changes by the Basel Committee on Banking Supervision to the international standard.
The consultation letter and draft prudential standard are available on the APRA website at https://www.apra.gov.au/leverage-ratio-requirement-for-authorised-deposit-taking-institutions
The proposals outlined in this letter relate solely to the leverage ratio requirement for ADIs that apply the internal ratings-based (IRB) approach to credit risk.
Subsequent to APRA’s November 2018 consultation, the Basel Committee released a revised leverage ratio standard that amended the treatment of client cleared derivatives. The revised treatment allows banks to apply the standardised approach to measuring counterparty credit risk (SA-CCR) to its client exposures. This amendment seeks to ensure that the leverage ratio does not discourage banks from providing client clearing services.
APRA is proposing to adopt the Basel Committee’s revised treatment for client cleared derivatives. The amendments that would give effect to this proposal are marked-up in the accompanying draft revised APS 110.
The calculation of the leverage ratio as a minimum capital requirement requires IRB ADIs to calculate counterparty credit risk for derivative exposures using a modified version of SA-CCR. This approach is different to the current calculation of the leverage ratio for public disclosure, which requires the use of the current exposure method (CEM).
APRA will allow IRB ADIs to adopt modified SA-CCR early for the purpose of their leverage ratio disclosures under Prudential Standard APS 330 Public Disclosure. IRB ADIs that intend to adopt modified SA-CCR early will need to seek APRA’s prior approval. For this purpose, an ADI 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 ADI must also provide a waterfall of its leverage ratio exposure measure calculation using modified SA-CCR that can be reconciled against its SA-CCR calculations under the risk-based capital framework. Where APRA is satisfied with the ADI’s implementation, it will provide the ADI with written approval to adopt modified SA-CCR early.
Those IRB ADIs 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 1 January 2022, at which time all IRB ADIs will be required to use modified SA-CCR to meet both the minimum capital and public disclosure leverage ratio requirements.
