The Australian Prudential Regulation Authority (APRA) has revealed an interim change to the capital treatment of new or additional equity investments in banking and insurance subsidiaries, according to a letter from the authority addressed to all authorised deposit-taking institutions (ADIs).
The interim measure dictates there will be no change to the capital treatment of any existing equity investments for these subsidiaries, and these exposures will still be risk weighted at 300% if listed or 400% if unlisted.
Where there will be a change is that any new or additional equity investments in banking and insurance subsidiaries – where the amount of that investment takes the aggregate value of the investment above 10% of an ADI’s Common Equity Tier 1 (CET1) capital – will need to be fully funded by equity capital at the ADI parent company level, according to APRA. Moreover, this measure will apply specifically to the proportion of the new or additional investment that is above 10% of an ADI’s CET1 capital.
The goal of this change is to ensure that any new or additional equity investments that fall under this definition are backed by enough capital to reduce the risk to Australian depositors.
The interim change stems from APRA’s planned revisions to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111) that it outlined back in October 2019. The adjustment to the capital treatment of ADI’s equity investments in these subsidiaries was actually the key proposal underscored by the authority at that time.
APRA’s finalisation and implementation of APS 111 is planned for 2021 and 2022 respectively, but the authority states that any new or additional equity investments made before this time should be undertaken with the proposed policy in mind, and ADIs need to let APRA know about any such investments during the interim period.
Notably, APRA clarified that the interim measure doesn’t impact current investments and also does not prohibit ADIs from making new investments or increasing their existing investments in banking and insurance subsidiaries.