Banking (prudential standard) determination No. 1 of 2017
EXPLANATORY STATEMENT
Prepared by the Australian Prudential Regulation Authority (APRA)
Banking Act 1959, section 11AF
Under subsection 11AF(1) of the Banking Act 1959 (the Act), APRA has the power to determine standards (prudential standards), in writing, in relation to prudential matters to be complied with by authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised NOHCs). Under subsection 11AF(3) of the Act, APRA may, in writing, vary or revoke a prudential standard.
On 10 January 2017, APRA made Banking (prudential standard) determination No. 1 of 2017 (the instrument) which revokes Prudential Standard APS 210 Liquidity made under Banking (prudential standard) determination No. 2 of 2014 and determines a new Prudential Standard APS 210 Liquidity (APS 210).
The instrument commences on 1 January 2018.
- Background
APRA’s mandate is to ensure the safety and soundness of prudentially regulated financial institutions so that they can meet their financial promises to depositors, policyholders and fund members within a stable, efficient and competitive financial system.
APRA carries out this mandate through a multi-layered prudential framework that encompasses licensing and supervision of institutions. In the case of the banking industry, APRA is empowered under the Banking Act to issue legally binding prudential standards that set out specific prudential requirements with which ADIs must comply. These standards are supported by prudential practice guides (PPGs), which clarify APRA’s expectations with regard to prudential requirements.
APRA regularly reviews its regulatory regime and amends its prudential requirements as a result of a number of factors including:
- international developments;
- changes in financial market conditions;
- changes in risk management practices, in response to identified weaknesses in the prudential framework; and
- to reduce potential negative impacts of emerging industry issues.
APRA’s prudential framework[1] for ADIs is based on the framework agreed by the Basel Committee on Banking Supervision (Basel Committee). In December 2010, the Basel Committee released Basel III: International framework for liquidity risk measurement, standards and monitoring,[2] which set out key measures designed to strengthen the liquidity risk profile of banks thereby promoting a more resilient global banking system. APRA implemented the first of these measures, being the liquidity coverage ratio (LCR), with effect from 1 January 2015. The Basel Committee released its final version of the second of these measures – the net stable funding ratio (NSFR) in October 2014. The NSFR is designed to ensure that ADIs fund their activities with appropriate stable funding sources.
2. Purpose and operation of the instrument
The purpose of the instrument is to revoke the existing APS 210 and to replace it with a new version of APS 210.
APS 210 provides for the implementation in Australia of the NSFR, a key component of the Basel III liquidity reforms designed to improve the banking system’s funding resilience. The NSFR comes into force from 1 January 2018.
The new version of APS 210 introduces the second international liquidity standard – the NSFR – which requires internationally active ADIs to hold a minimum level of stable funding in relation to on- and off-balance sheet activities. By holding stable funding, the risk to an ADI’s funding sources and in the event of a crisis will be minimised thereby helping to reduce the risk of failure and broader financial system instability.
The key changes to the new APS 210 include:
- inclusion of a new Attachment C which sets out the detailed requirements in relation to the NSFR;
- changing the requirement to develop an annual funding strategy to a three-year funding strategy to be reviewed at least annually;
- removal of the requirement for an ADI to perform a going concern analysis which includes removal of Attachment B in the 2014 version of APS 210;
- making explicit that an ADI is to maintain an LCR of at least 100 per cent on both an Australian dollar and all-currencies basis;
- modifying the requirement for recognition of head office committed funding facilities by a foreign ADI (i.e. an overseas ADI operating as a branch in Australia) such that a foreign ADI may meet up to 50 per cent of its LCR liquid assets requirement with a head office committed funding facility;
- inclusion of a new requirement for a foreign ADI to perform an annual assessment of its local operational capacity to liquidate assets and make or receive payments without assistance from staff located outside Australia and to provide the results of the assessment to APRA;
- inclusion of a provision such that an ADI will need to contact APRA should the ADI intend to place reliance on a previous exemption or other exercise of discretion by APRA under a previous version of APS 210;
- and other minor drafting changes for the purposes of clarity or consistency within APS 210 or with drafting styles applied across APRA prudential standards more generally.
APS 210 incorporates by reference certain provisions of Acts and Prudential Standards. All of these references are references to the provisions as in force from time to time, and are available on the Federal Register of Legislation at www.legislation.gov.au. APS 210 also incorporates by reference the Basel III leverage ratio framework and disclosure requirements as set out by the Basel Committee on Banking Supervision in Basel III leverage ratio framework and disclosure requirements as it exists at 12 January 2014. This document is available at http://www.bis.org/publ/bcbs270.htm.
3. Consultation
APRA undertook consultation on the proposed amendments to APS 210 from March 2016 to October 2016. APRA’s formal public consultation package consisted of a public discussion paper dated 31 March 2016[3] and a public response paper dated 29 September 2016[4] along with a draft prudential standard and prudential practice guide.
A total of 19 submissions were received in response to APRA’s March 2016 discussion paper. APRA revised a number of its original policy proposals after consideration of information provided in submissions on the likely impacts of certain aspects of APRA’s proposals. These included changes to the amount of stable funding to be held for certain assets eligible as collateral to secure funding from the Reserve Bank of Australia, the recognition of certain additional liquid assets for LCR purposes and hence for recognition in an ADI’s NSFR and Australian listed equities to be eligible for a lesser amount of stable funding. APRA further proposed to retain the existing 40 per cent LCR as the default liquid assets requirement for foreign ADIs, but will also consider applications from a foreign ADI to use the existing minimum liquidity holdings regime. This provides recognition of different circumstances of such ADIs.
A further eight submissions were received on APRA’s September 2016 response to submissions paper. In response, APRA included an additional provision in the prudential standard to clarify that for a non-maturity reverse repo, APRA would consider the repo as having a different maturity period and hence the required stable funding to be held in such cases where an ADI is able to demonstrate to APRA’s satisfaction that the reverse repo will actually mature within a different maturity period.
4. Regulation Impact Statement
APRA prepared a Regulation Impact Statement which has been lodged as supporting material.
5. Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
A Statement of compatibility prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 is provided at Attachment A to this Explanatory Statement.
Attachment A
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Banking (prudential standard) determination No. 1 of 2017
This Legislative Instrument is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3 of the
Human Rights (Parliamentary Scrutiny) Act 2011 (HRPS Act).
Overview of the Legislative Instrument
The instrument revokes Prudential Standard APS 210 Liquidity made under Banking (prudential standard) determination No. 2 of 2014 and determines a new Prudential Standard APS 210 Liquidity (APS 210). APS 210 aims to ensure that an authorised deposit-taking institution (being a bank, credit union or building society) adopts prudent practices in managing its liquidity risks including maintaining an adequate level of liquidity to meet its obligations as they fall due across a wide range of operating circumstances and that it maintains a funding structure appropriate for its size, business mix and complexity.
Human rights implications
APRA has assessed the instrument and is of the view that it does not engage any of
the applicable rights or freedoms recognised or declared in the international
instruments listed in section 3 of the HRPS Act. Accordingly, in APRA’s assessment,
the instrument is compatible with human rights.
Conclusion
This Legislative Instrument is compatible with human rights as it does not raise any
human rights issues.
[1] The prudential framework refers to the rules that a regulated institution is required to comply with as a condition of its licence.
[2] Basel III: International framework for liquidity risk measurement, standards and monitoring, Basel Committee, December 2010.
[3] Refer to http://www.apra.gov.au/adi/PrudentialFramework/Pages/Basel-III-liquidity-NSFR-March-2016.aspx.
[4] Refer to http://www.apra.gov.au/adi/PrudentialFramework/Pages/Basel-III-liquidity-NSFR-September-2016.aspx.