Capital treatment of investments in overseas deposit-taking and insurance subsidiaries - Frequently asked questions
APRA has published the following frequently asked questions (FAQs) to clarify the regulatory capital treatment of overseas deposit-taking and insurance subsidiaries.
The FAQs are relevant to ADIs that hold these investments via holding companies and confirm that ADIs can use the indirect equity investment provisions in Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111) to determine the capital treatment for these exposures.
1. How should ADIs calculate the amount of capital they need to hold against their exposures to overseas deposit-taking and insurance subsidiaries held through NOHCs for capital purposes at Level 1?
The amount of capital to be held by an ADI against its equity investments in overseas deposit-taking and insurance subsidiaries may, at Level 1, be determined using the ‘look through’ method in APS 111 (January 2022) Attachment D paragraph 9(f) and footnote 17. That is, ADIs may treat the underlying investments in their overseas banking and insurance subsidiaries as indirect equity exposures under paragraph 9(f), subject to footnote 17.
APRA considers that indirect equity exposures represent exposures that will result in a loss to the ADI substantially equivalent to any loss in the direct holding. Therefore ADIs, may, if the overseas deposit-taking or insurance subsidiary meets these criteria, use the concessional approach in paragraph 9(f). APRA expects an ADI wishing to use this approach in respect of an offshore deposit-taking or insurance subsidiary to notify APRA.
2. Is there any difference in the treatment of equity and debt exposures to overseas deposit-taking and insurance subsidiaries held through NOHCs for capital purposes at Level 1?
APRA expects that any debt provided to these NOHCs which funds equity or capital investments in overseas deposit-taking or insurance subsidiaries will not be risk-weighted as debt. Rather, it will be included as part of the indirect equity exposure in the overseas deposit-taking or insurance subsidiary in accordance with Attachment D paragraph 9(f).
Note: the Prudential standard references above are to the 1 January 2022 version of the standard.
These Frequently Asked Questions (FAQs) are published for discussion purposes only. The content of these FAQs is not legal advice. Users are encouraged to obtain professional advice about the application of any legislation or prudential standard to their particular circumstances. Users should exercise their own skill and care when relying on any material contained in the FAQs. APRA disclaims any liability for any loss or damage arising out of any use of or reliance on these FAQs. The FAQs may include links to external websites that are beyond APRA’s control. APRA accepts no responsibility for the accuracy, completeness or currency of the content of these FAQs.