The Australian Prudential Regulation Authority (APRA) has released its response to the first round of consultation on proposed changes to the capital framework for authorised deposit-taking institutions (ADIs).
The package of proposed changes, first released in February last year, flows from the finalised Basel III reforms, as well as the Financial System Inquiry recommendation for the capital ratios of Australian ADIs to be ’unquestionably strong’.
ADIs that already meet the ‘unquestionably strong’ capital targets that APRA announced in July 2017 should not need to raise additional capital to meet these new measures. Rather, the measures aim to reinforce the safety and stability of the ADI sector by better aligning capital requirements with underlying risk, especially with regards to residential mortgage lending.
APRA received 18 industry submissions to the proposed revisions, and today released a Response Paper, as well as drafts of three updated prudential standards: APS 112 Capital Adequacy: Standardised Approach to Credit Risk; the residential mortgages extract of APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk; and APS 115 Capital Adequacy: Standardised Measurement Approach to Operational Risk.
The Response Paper details revised capital requirements for residential mortgages, credit risk and operational risk requirements under the standardised approaches, as well as a simplified capital framework for small, less complex ADIs. Other measures proposed in the February 2018 Discussion Paper, as well as improvements to the transparency, comparability and flexibility of the ADI capital framework, will be consulted on in a subsequent response paper due to be released in the second half of 2019.
After taking into account both industry feedback and the findings of a quantitative impact study, APRA is proposing to revise some of its initial proposals, including:
- for residential mortgages, some narrowing in the capital difference that applies to lower risk owner-occupied, principal-and-interest mortgages and all other mortgages;
- more granular risk weight buckets and the recognition of additional types of collateral for SME lending, as recommended by the Productivity Commission in its report on Competition in the Financial System; and
- lower risk weights for credit cards and personal loans secured by vehicles.
The latest proposals do not, at this stage, make
any change to the Level 1 risk weight for ADIs’ equity investments in
subsidiary ADIs. This issue has been raised by stakeholders in response to
proposed changes to the capital adequacy framework in New Zealand. APRA has
been actively engaging with the Reserve Bank of New Zealand on this issue, and
any change to the current approach will be consulted on as part of APRA’s
review of Prudential Standard
APS 111 Capital Adequacy: Measurement of Capital later this year.
APRA’s consultation on the revisions to the ADI capital framework is a
multi-year project. APRA expects to conduct one further round of consultation
on the draft prudential standards for credit risk prior to their finalisation.
It is intended that they will come into effect from 1 January 2022, in line
with the Basel Committee on Banking Supervision’s internationally agreed
implementation date. An exception is the operational risk capital proposals for
ADIs that currently use advanced models: APRA is proposing these new
requirements be implemented from the earlier date of 1 January 2021.
APRA Chair Wayne Byres said: “In setting out these latest proposals, APRA has
sought to balance its primary objectives of implementing the Basel III
reforms and ‘unquestionably strong’ capital ratios with a range of important
secondary objectives. These objectives include targeting the structural
concentration in residential mortgages in the Australian banking system, and
ensuring an appropriate competitive outcome between different approaches to
measuring capital adequacy.
“With regard to the impact of risk weights on competition in the mortgage
market, APRA has previously made changes that mean any differential in overall
capital requirements is already fairly minimal. APRA does not intend that the
changes in this package of proposals should materially change that calibration,
and will use the consultation process and quantitative impact study to ensure
that is achieved.
“It is also important to note that the proposals announced today will not
require ADIs to hold any capital additional beyond the targets already
announced in relation to the unquestionably strong benchmarks, nor do we expect
to see any material impact on the availability of credit for borrowers,” Mr
Byres said
