Banking (prudential standard) determination No. 4 of 2026
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 8 May 2026, APRA made Banking (prudential standard) determination No. 4 of 2026 (the instrument), which revokes Prudential Standard APS 221 Large Exposures made under Banking (prudential standard) determination No. 15 of 2022 and determines a new Prudential Standard APS 221 Large Exposures (APS 221).
The instrument commences on 1 January 2027.
1. 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 Act to issue legally binding prudential standards that set out specific prudential requirements with which ADIs must comply.
A key aspect of APRA’s prudential framework are the standards that require ADIs to prudently manage risks, one of which is APS 221. APS 221 requires ADIs to implement prudent measures and set prudent limits on their exposures (e.g. loans) to counterparties, to monitor and control their large exposures and risk concentrations. A risk concentration occurs when an ADI has a concentration of exposures to counterparties, industries, countries or particular asset classes. APS 221 is largely based on the Basel Committee on Banking Supervision’s Standards: Supervisory framework for measuring and controlling large exposures.
2. Purpose and operation of the instrument
The purpose of the instrument is to revoke the existing APS 221 and replace it with a new version of APS 221.
APS 221 sets out the requirements for ADIs to identify, measure, monitor, and control their large exposures and risk concentrations. It applies on both a Level 1 (individual ADI) and Level 2 (banking group) basis and also extends to authorised NOHCs where applicable.
The new APS 221 incorporates an amendment resulting from APRA’s decision to remove Additional Tier 1 (AT1) Capital from the bank prudential framework. Given the removal of AT1 from the prudential framework, the large exposure limit is now calculated based on Common Equity Tier 1 Capital rather than AT1 Capital. This change maintains alignment with the concept of ‘going concern’ capital and ensures consistency with other capital metrics such as the leverage ratio.
APRA’s decision to remove AT1 Capital is based on the challenges with AT1 Capital meeting its regulatory objectives of stabilising an ADI so that it can continue to operate as a going concern during a period of stress and supporting resolution with the capital strength that is needed to prevent a disorderly failure.
Details of the new prudential standard
See Attachment A.
Documents incorporated by reference
Under paragraph 14(1)(a) of the Legislation Act 2003, the standard incorporates by reference as in force from time to time:
- Acts of Parliament and associated delegated laws;
- Prudential Standards determined by APRA under subsection 11AF(1) of the Act; and
- the Australian Accounting Standards determined under section 334 of the Corporations Act 2001 (Cth).
These documents may be freely obtained on the Federal Register of Legislation at www.legislation.gov.au (all documents listed above except for Australian Accounting Standards), and https://www.aasb.gov.au/pronouncements/accounting-standards/ (Australian Accounting Standards).
Under paragraph 14(1)(b) of the Legislation Act 2003, the standard incorporates by reference as existing at the commencement of the standard:
- APRA’s Information Paper: Domestic systemically important banks in Australia as at 23 December 2013. The paper is freely available at www.apra.gov.au/news-and-publications/apra-releases-framework-for-domestic-systemically-important-banks-australia.
Exercise of discretion by APRA
Under subsection 11AF(2) of the Act, a prudential standard may provide for APRA to exercise powers and discretions under the standard, including (but not limited to) discretions to approve, impose, adjust or exclude specific prudential requirements in relation to one or more specified ADIs or authorised NOHCs.
APRA’s prudential standards include powers that may be exercised by APRA that involve an element of discretion and that may affect the interests of the entities to which the prudential standards apply. These powers include a power to adjust or exclude a provision of the prudential standard.
The need to apply discretion is driven by entity-specific issues and circumstances that are not adequately addressed by the generally applicable provisions of the prudential standards. For example, adjustment or exclusion of a provision may be necessary to obtain a better prudential outcome than would be the case if the prudential requirement were applied unaltered to a particular regulated entity.
When exercising its discretion, APRA considers a wide range of factors, including the considerations set out in the Act and the Australian Prudential Regulation Authority Act 1998.
The exercise of APRA's powers is governed by a robust decision-making framework which is documented in APRA's internal policies. This framework supports APRA in fulfilling its mandate by limiting decision making to those senior APRA officers with the appropriate experience and skill to exercise prudent judgement. The framework also requires decision makers to seek advice from internal technical experts.
The power is also exercised following discussion with the relevant ADI about its appropriateness and the impact it may have on the entity.
Review of decisions
Decisions made by APRA exercising powers in prudential standards are not themselves subject to merits review. This is because these decisions are preliminary decisions that may facilitate or lead to substantive decisions which are subject to merits review.
A breach of a prudential standard is a breach of the Act, as section 11AG of the Act provides that ADIs and authorised NOHCs must comply with applicable prudential standards. However, there are no penalties prescribed for such breaches. Instead, an ADI’s breach of a provision in the Act is a ground for APRA to make further, substantive decisions under the Act in relation to the ADI. Those decisions are:
- to revoke an authority to carry on banking business (section 9A of the Act); and
- to issue a direction to the ADI, including a direction to comply with the whole or part of a prudential standard (section 11CA of the Act).
It is only at this stage that the ADI is exposed to a penalty: loss of its authority under section 9A or 50 penalty units if it breaches the direction (section 11CG of the Act). In nearly all cases[1] the decision is preceded by a full consultation with the ADI to raise any concerns it may have in relation to the decision.
A decision of APRA to impose a direction is subject to merits review under section 11CA of the Act, which is appropriately available at the point where an ADI could be exposed to a penalty.
A decision of APRA to revoke an authority under the Act is subject to merits review, unless either:
- APRA has determined that access to natural justice and merits review is contrary to the national interest or contrary to the interests of depositors with the ADI; or
- the authority is an authority that is to cease to have effect on a day specified in the authority (subsection 9A(8) of the Act).
3. Consultation
In December 2024, APRA released a letter to industry providing an update on APRA’s consultation on a more effective capital framework for a crisis.[2] The letter confirmed that APRA is proceeding with its proposal to replace AT1 Capital in the bank prudential framework with more reliable and effective forms of capital. In July 2025, APRA consulted on amendments to its prudential and reporting frameworks necessary to implement this decision.[3]
APRA received five submissions to its consultation. The final amendments reflect both industry feedback and revisions by APRA, with a focus on ensuring existing AT1 Capital continues to operate as intended throughout the transitional period.
While APRA’s consultation was focused on amendments to remove AT1, some submissions raised broader issues including, for example, changes to the measurement of large exposures. APRA had considered these policy issues in past consultations and did not propose any further changes to the prudential framework at this stage.
In December 2025, APRA released a letter finalising the removal of Additional Tier 1 Capital.[4]
All consultations related to the AT1 reforms are available on the APRA website. Non-confidential submissions are available on APRA’s website.
APRA is satisfied the consultation was appropriate and reasonably practicable.
4. Impact Analysis
The Office of Impact Analysis confirmed that a Regulation Impact Statement was not required.
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 B to this Explanatory Statement.
ATTACHMENT A
Details of the new prudential standard
Authority, application, commencement, interpretation and definitions
Under subsection 11AF(1) of the Act, APRA may determine prudential standards to be complied with by (among others) all, or specified classes of, ADIs and authorised NOHCs.
Paragraphs 1 to 9 are the machinery provisions relating to the legal authority under which the instrument is made, the ADIs and authorised NOHCs that are required to comply with the standard, the commencement date, interpretation, and definitions used in the prudential standard.
The role of the Board
Paragraph 10 outlines that the Board of an ADI is responsible for overseeing large exposures and risk concentrations, including approving and annually reviewing related policies. These policies must align with the ADI’s risk appetite, profile, capital, and balance sheet size.
Control of large exposures and risk concentrations
Paragraphs 11 to 14 outline that an ADI must establish policies that set prudent limits on exposures to counterparties, sectors, countries, and asset classes, and ensure these are embedded in its risk management framework. These policies must include systems for monitoring, approval processes for limit breaches, and annual reviews, with unlimited exposures to any single counterparty explicitly prohibited.
Identifying large exposures
Paragraphs 15-19 define a large exposure as any exposure to a single counterparty or group of connected counterparties that equals or exceeds 10% of an ADI’s Common Equity Tier 1 Capital, measured across both banking and trading books. Certain exposures—such as those to the Australian Government, RBA, or qualifying central counterparties—are excluded, and where credit protection is used, the ADI must recognise exposure to the protection provider.
Connected counterparties
Paragraphs 20 to 29 require ADIs to treat groups of connected counterparties as a single counterparty where control, economic interdependence, or other risk-linking relationships exist. ADIs must assess and document these connections, with APRA retaining discretion to require grouping where it identifies single-risk exposure.
Large exposure limits
Paragraphs 30 to 31 cap an ADI’s exposure to a single counterparty or group of connected counterparties at 25% of Common Equity Tier 1 Capital, with exceptions allowing up to 50% for certain foreign sovereign exposures and 20% for exposures between domestic systemically important banks (D-SIBs). APRA retains discretion to impose tailored limits based on the ADI’s specific risk profile, including exposures to sectors, countries, or asset classes.
Measuring large exposure values
Paragraphs 32 to 33 outline the factors that an entity should consider when measuring large exposures and specify that APRA may intervene to determine exposure values where it deems an ADI’s assessment to be inadequate.
Prior notification requirements
Paragraphs 34 to 35 require an ADI to notify APRA before committing to large exposures to non-government and non-ADI counterparties, unless APRA has determined that the ADI is not required to notify certain exposures based on the ADI’s credit risk management strength.
Approval requirements
Paragraph 36 requires an ADI to obtain APRA’s prior approval for exposures that exceed the large exposure limits.
Notification requirements
Paragraphs 37 to 38 require an ADI to notify APRA of any breach of large exposure limits or emerging concerns about material impacts on capital adequacy.
Significant risk concentrations
Paragraph 39 outlines that where an ADI holds multiple large exposures or APRA identifies a material risk concentration, APRA may require higher capital requirements, impose increased risk-weights, or direct the ADI to reduce its concentration level.
Adjustments and exclusions
Paragraph 40 relies on subsection 11AF(2) of the Act and provides for APRA to adjust or exclude a specific prudential requirement in the standard in relation to one or more specified ADIs or authorised NOHCs.
Previous exercise of discretion
Paragraph 41 requires an ADI to contact APRA if it seeks to rely on an exercise of APRA’s discretion under a previous version of the prudential standard.
Attachment A—Measuring large exposure values
Paragraph 1 specifies how exposure values must be calculated across different asset types.
Credit risk mitigation
Paragraphs 2 to 6 require ADIs to apply eligible credit risk mitigation techniques in measuring large exposures where such techniques are used for capital calculations, with specific rules for guarantees, derivatives, and collateral approaches.
On-balance sheet netting
Paragraph 7 outlines that, in relation to netting, an ADI should follow requirements set out in APS 112.
Exposure values for trading book positions
Paragraph 8 to 13 require ADIs to combine banking and trading book exposures when assessing counterparty risk, using market values for non-derivative instruments and decomposed positions for derivatives in line with APS 116. ADIs must also apply specific valuation methods for options, credit derivatives, and structured transactions, and assign exposures to either the underlying assets or the structured vehicle itself where identification is not possible.
Offsetting long and short positions in the trading book in the same issue
Paragraph 14 permits offsetting of long and short positions in the same issue.
Offsetting long and short positions in the trading book in different issues
Paragraphs 15 to 19 outline circumstances where ADIs are allowed to offset positions in different issues from the same issuer.
Exposure values for covered bonds
Paragraph 20 outlines how exposure value is calculated for a covered bond and to whom it should be attributed.
Exposures to structured vehicles
Paragraphs 21 to 30 specify the approach ADIs should take when assessing structured vehicles. ADIs are also required to identify and aggregate exposures linked to third parties that contribute additional risk factors, treating them as connected counterparties where material risks exist.
Exposure values for non-qualifying central counterparties and clearing activity exposures
Paragraphs 31 to 34 outline the approach that ADIs must take to assess exposures from clearing activities.
ATTACHMENT B
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 4 of 2026
The 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 purpose of the legislative instrument is to revoke Prudential Standard APS 221 Large Exposures (APS 221) and replace it with a new version of APS 221.
APS 221 sets out requirements for an authorised deposit-taking institution (ADI) to implement measures and set limits on their exposures (e.g. loans) to counterparties, and to monitor and control their large exposures and risk concentrations. ADIs are bodies corporate that have been granted the authority, under the Banking Act 1959, to carry on banking business in Australia.
Human rights implications
APRA has assessed the legislative 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 legislative instrument is compatible with human rights.
Conclusion
The legislative instrument is compatible with human rights as it does not raise any human rights issues.
[1] Subsection 9A(4) of the Act specifically provides that APRA does not need to consult where APRA is satisfied that doing so could result in a delay in revocation that would be:
- contrary to the national interest; or
- contrary to the interests of depositors with the ADI.
[2] APRA letter ‘A more effective capital framework for a crisis: Update’, December 2024.
[3] APRA Consultation paper ‘Removing Additional Tier 1 capital from the prudential framework’, July 2025.
[4] APRA letter ‘Finalising the removal of Additional Tier 1 capital’, December 2025.