The Australian Prudential Regulation Authority (APRA)has announced it will undertake a public consultation on proposed enhancements to the prudential framework for authorised deposit-taking institutions (ADIs),with a focus on capital adequacy and liquidity requirements. The proposed reforms are intended to strengthen the resilience of Australia’s banking sector.

APRA has confirmed it will release consultation papers on proposed amendments to the capital adequacy and liquidity requirements that apply to ADIs. The consultation follows a recent review conducted by APRA to ensure the capital and liquidity framework remains fit for purpose.  APRA indicated that it has identified opportunities to uplift its liquidity settings to bring them in line with international practice, while making the capital framework more risk sensitive.

According to APRA, the proposed enhancements will focus on a number of key areas.

  1. Liquidity framework: For the largest ADIs, APRA proposes changes to the liquidity framework, including consideration of a new Pillar 2 liquidity framework to address risks not covered by existing Liquidity Coverage Ratio minimum requirements. According to APRA, these changes will support its supervisory focus on liquidity risk and bring existing policies into line with international practice. For smaller ADIs, APRA intends to consult on a more risk-sensitive liquidity risk framework designed to incentivise more robust practice. APRA expects these changes to lead to cost savings for smaller ADIs that rely on more stable funding sources.
  1. Capital framework: APRA intends to consult on targeted amendments to the standardised capital framework to better align capital requirements with underlying risk, which APRA expects will reduce overall capital requirements for some ADIs. APRA’s key areas of focus will include the treatment of high-quality lending to critical infrastructure projects, corporates without a credit rating, and residential property development. According to APRA, the planned changes have the potential to positively impact business lending and investment.
  1. Trading book risk: APRA proposes to implement a simplified approach to the Basel Committee’s Fundamental Review of the Trading Book (FRTB). According to APRA, this simplified approach is intended to better reflect the risks present in Australia’s banking system and is expected to materially reduce compliance costs for ADIs compared with full implementation of the FRTB framework.

More broadly, APRA has indicated that the proposals follow several years of heightened geopolitical and market volatility that have underscored the importance of maintaining robust prudential settings.

The consultation also presents an important opportunity for ADIs and industry bodies to provide feedback to APRA. APRA will consult on the package in stages, beginning with consultation on changes to standardised risk weights for credit risk in the first half of this year. We will provide further updates as the consultation progresses.

A letter to industry with a detailed outline of APRA’s proposed reforms and indicative consultation timetable is available at: APRA’s roadmap for capital and liquidity reforms for authorised deposit-taking institutions (ADIs).