APRA proposes changes in regulatory capital requirements for ADIs

Australia’s prudential regulator has launched a review of the capital treatment of authorised deposit-taking institutions’ (ADIs’) investments in their banking and insurance units.

The Australian Prudential Regulation Authority (APRA) proposed the following changes to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111), to increase the amount of equity required to support investments in large subsidiaries and reduce that for small subsidiaries:

• Increase the capital ADIs must hold to offset concentrated exposures to foreign or domestic banking or insurance subsidiaries;
• Reduce the capital ADIs must hold to offset smaller exposures to banking or insurance subsidiaries;
• Incorporate into the prudential standard various rulings and technical information APRA has published since APS 111 was last substantially updated in 2013; and 
• Align APS 111 with updated guidance from the Basel Committee on Banking Supervision.

“An ADI’s capital base is the cornerstone of its financial soundness and ability to meet its obligations to deposit holders,” said John Lonsdale, APRA deputy chair. “These proposed measures seek to support the resilience of the major banks’ Australian operations.”

APRA said it estimates that no material additional capital will be required at an aggregate industry level, but that individual ADIs may need to raise capital, or may gain a capital benefit, depending on the level of their exposures to subsidiaries. 

Consultation on the proposed changes will close on January 31 and the updated prudential standard is expected to come into force from January 01, 2021.