Banking (prudential standard) determination No. 5 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. 5 of 2026 (the instrument), which revokes Prudential Standard APS 222 Associations with Related Entities made under Banking (prudential standard) determination No. 7 of 2020 and determines a new Prudential Standard APS 222 Associations with Related Entities (APS 222).
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 222. APS 222 requires ADIs to implement prudent measures and to set prudent limits on exposures arising from their associations and dealings with related entities and introduces requirements relating to dealings with entities where an ADI is likely to provide support beyond any legal obligation.
Associations with related entities introduce the potential for material contagion risk within the banking sector. When an ADI has dealings with related entities, there are contagion risks which would otherwise not exist when dealing with unrelated entities.
As demonstrated during the global financial crisis, these contagion risks can be severe if there are deficiencies in controls to mitigate the flow of this risk to an ADI. Such deficiencies can ultimately manifest in financial and reputational contagion, and adversely impact Australian depositors, particularly in a stress scenario. Financial contagion risk may arise when an ADI has a concentration of exposures to its related entities. Furthermore, reputational contagion may arise where investors perceive that a related entity faces operational or financial difficulties or where an ADI could be seen to step in to support a group member beyond any legal obligation.
2. Purpose and operation of the instrument
The purpose of the instrument is to revoke the existing APS 222 and replace it with a new version of APS 222.
APS 222 sets out requirements for ADIs to implement prudent measures and set prudent limits on exposures arising from their associations and dealings with related entities.
The new APS 222 incorporates amendments 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 related entity exposure limit will be based on Common Equity Tier 1 (CET1) Capital rather than Tier 1 Capital. This change maintains alignment with the concept of ‘going concern’ capital and ensures consistency with other prudential requirements 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; and
- Prudential Standards determined by APRA under subsection 11AF(1) of the Act.
These documents may be freely obtained on the Federal Register of Legislation at www.legislation.gov.au.
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 submissions did not raise any substantive concerns with the consequential changes to APS 222. 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.
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 Regulatory 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 that are required to comply with the standard, the commencement date, interpretation, and definitions used in the prudential standard.
Adjustments and exclusions
Paragraph 10 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.
Previous exercise of discretion
Paragraph 11 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.
The role of the Board
Paragraph 12 outlines that the Board of an ADI is responsible for overseeing associations with related entities, 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 risks arising from related entities
Paragraphs 13 to 18 require an ADI to incorporate contagion risk considerations into its risk management framework and policies governing related entity dealings, ensuring these are reviewed annually and reflect the group’s structure, complexity and interdependencies. These policies must include arm’s-length requirements, exposure limits, approval processes, and controls to manage material risks, with APRA able to impose additional requirements if contagion risks are deemed substantial.
Provision of support
Paragraphs 19 to 23 restrict an ADI from engaging in transactions with unrelated entities to benefit related entities, nor provide or accept support from related entities unless such arrangements are legally documented, time-bound, and aligned with prudential requirements. It also outlines that APRA may require capital deductions or impose additional controls where asset transactions suggest capital support.
Group badging and disclosures
Paragraphs 24 to 26 require an ADI to ensure shared branding with group members is accompanied by clear disclosures to prevent misperceptions of regulatory status or implied support.
Participation in group operations
Paragraphs 27 to 28 outline an ADI’s obligation to implement policies and procedures to manage risks arising from shared group operations.
Limits on exposures to related entities
Paragraphs 29 to 33 specify limits on exposures to related entities.
Measuring exposures to related entities
Paragraphs 34 to 37 specify how to measure exposures to related entities.
Prior notification requirements
Paragraphs 38 to 40 require an ADI to notify APRA before establishing subsidiaries or committing to large acquisitions or exposures, unless APRA has exempted the ADI based on its risk management strength.
Notification requirements
Paragraphs 41 to 43 require an ADI to notify APRA of exposure limit breaches or material developments affecting the ADI.
Approval requirements
Paragraphs 44 to 45 require an ADI obtain APRA’s prior approval for both exposures that exceed limits and the establishment of a presence domestically or overseas.
Attachment A — Step-in risk
Paragraphs 1 to 4 require an ADI maintain a documented risk appetite and strategy for managing step-in risk, supported by systems to identify, assess and monitor exposures to entities where the ADI may be perceived to provide implicit support.
Attachment B — Funds management
Paragraph 1 outlines that an ADI must meet the requirements of APS 221 where it has an exposure to a funds management vehicle that is an unrelated entity.
Separation
Paragraphs 2 to 5 outline that an ADI must not assume managerial or trustee roles in funds management and must maintain arm’s length dealings with such vehicles.
Purchase of securities
Paragraph 6 outlines restrictions on the purchase of a funds management vehicle’s securities.
Liquidity facilities
Paragraph 7 sets out the circumstances where the value of a liquidity facility to a funds management vehicle must be deducted from CET1 Capital.
Underwriting of funds management vehicles
Paragraphs 8 to 9 set out the circumstances where an ADI that acts as underwriter or committed dealer for the issue of securities by a funds management vehicle must deduct the value of the facility from CET1 Capital.
Attachment C — Extended Licensed Entity
Paragraphs 1 to 5 outline the requirements that must be fulfilled by an ADI in order to consolidate a subsidiary into an ADI’s extended licensed entity.
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 5 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 222 Associations with Related Entities (APS 222) and replace it with a new version of APS 222.
APS 222 sets out requirements for an authorised deposit-taking institution (ADI) to implement prudent measures and limits on exposures arising from their associations and dealings with related entities. 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.