Banking (prudential standard) determination No. 1 of 2010
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority
Banking Act 1959 11AF
The purpose of this Instrument is to repeal Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (January 2008) (APS 112) and to replace it with a revised Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (December 2010).
1. Background
In November 2010, the World Bank requested the Australian Prudential Regulation Authority (APRA) to provide a view on risk-weighting for on-balance sheet assets under APS 112. In particular, it sought APRA's view on whether the International Finance Facility for Immunization (IFFIm) would qualify under APS 112, Appendix A, section 9, footnote 8, for a potential zero per cent risk-weighting.
It has been APRA's practice to follow the Basel Committee on Banking Supervision's (BCBS) categorisation of multilateral institutions, which allow banks to apply a zero per cent risk-weight on claims to these institutions. The BCBS included the IFFIm in its categorisation as a multilateral institution in October 2006. APRA has not updated APS 112 to reflect this amendment and is seeking to update APS 112 to be in line with the BCBS categorisation.
In addition, APRA also confirmed that in May 2010, the BCBS added the Multilateral Investment Guarantee Agency (MIGA) to its list of multilateral institutions and is also seeking to update APS 112 to include MIGA.
2. Purpose of the instrument
The purpose of the instrument is to create a revised APS 112 Prudential Standard Capital Adequacy: Standardised Approach to Credit Risk (December 2010) reflecting the amendment to include the two new multilateral institutions, and to revoke APS 112 Prudential Standard Capital Adequacy: Standardised Approach to Credit Risk (January 2008).
3. Operation of the instrument
There is no impact of the instrument on industry. Banks will benefit from the Instrument, which will allow banks to apply a zero per cent risk-weight to claims on the two multilateral institutions added to the revised APS 112.
4. Consultation
No consultation has occurred as the nature of the changes is such that consultation is unnecessary and inappropriate.
Overview
The Banking (Prudential Standard) Determination No. 1 of 2010, issued by the Australian Prudential Regulation Authority (APRA), is a legislative instrument designed to update the Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk. Enacted in 2010, the determination was introduced to address the need for consistency with the Basel Committee on Banking Supervision's (BCBS) categorisation of multilateral institutions, specifically regarding risk-weighting for certain assets. The determination seeks to ensure that Australian banks align with international standards by allowing a zero per cent risk-weight on claims to newly recognised multilateral institutions, such as the International Finance Facility for Immunization (IFFIm) and the Multilateral Investment Guarantee Agency (MIGA). The policy objective is to maintain the stability and integrity of the banking system by ensuring that capital adequacy standards are up-to-date and reflective of current international practices.
Scope and Application
The Banking (prudential standard) determination No. 1 of 2010, issued by the Australian Prudential Regulation Authority (APRA) under the Banking Act 1959, applies to authorised deposit-taking institutions in Australia. Its primary purpose is to update and replace the existing Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk, originally issued in January 2008, with a revised version dated December 2010. This revision aims to incorporate recent amendments by the Basel Committee on Banking Supervision (BCBS) concerning the risk-weighting of claims on multilateral institutions. Specifically, the determination addresses the inclusion of the International Finance Facility for Immunization (IFFIm) and the Multilateral Investment Guarantee Agency (MIGA) as eligible for a zero per cent risk-weight. This change aligns Australian banking standards with international practices and ensures that Australian banks can continue to benefit from the updated risk assessment framework. The revised standard applies nationally and directly impacts banking institutions by providing them with updated guidelines on capital adequacy requirements. There are no exclusions or exemptions specified within the text, and no consultation was deemed necessary due to the nature of the amendments.
Key Provisions
The Banking (Prudential Standard) Determination No. 1 of 2010 (F2010L03202) replaces the existing Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (January 2008) with a revised version (section 2). This revision is prompted by the need to align Australian Prudential Standard APS 112 with the Basel Committee on Banking Supervision's (BCBS) categorisation of multilateral institutions, particularly regarding the application of zero per cent risk-weighting for claims to certain institutions (section 1). The new standard includes the International Finance Facility for Immunization (IFFIm) and the Multilateral Investment Guarantee Agency (MIGA) as eligible for zero per cent risk-weighting, aligning with the BCBS categorisations made in October 2006 and May 2010 respectively (section 1).
This determination imposes an obligation on authorised deposit-taking institutions (ADIs) to adhere to the revised Prudential Standard APS 112 (section 2). Specifically, ADIs must now apply a zero per cent risk-weight to claims on the IFFIm and MIGA as per the updated standard. The revised standard aims to ensure that the capital adequacy requirements for credit risk are appropriately calibrated, reflecting the lower risk associated with these multilateral institutions.
There are no specific offences or penalties outlined in the determination for non-compliance with the revised APS 112. However, non-compliance with prudential standards generally can lead to regulatory scrutiny, potential enforcement actions, and other consequences as stipulated under the Banking Act 1959. Failure to comply with prudential requirements can also result in regulatory sanctions, including financial penalties and other measures aimed at ensuring compliance and maintaining the stability of the banking system.
The determination does not detail specific maximum penalties for breaches but indicates that non-compliance with prudential standards can lead to severe regulatory consequences. The Australian Prudential Regulation Authority (APRA) has the authority to impose sanctions under the Banking Act 1959, which can include financial penalties, directives to rectify non-compliance, and other enforcement actions to ensure adherence to the regulatory requirements. The primary focus of the determination is to update the prudential standard to align with international practices and provide clarity for ADIs regarding risk-weighting for claims on multilateral institutions.