APRA consults on enhancements to Basel II Framework

The Australian Prudential Regulation Authority (APRA) has released for consultation a discussion paper, accompanied by proposed amendments to relevant prudential standards and prudential practice guides (PPGs), on proposals to enhance the Basel II Framework in Australia. The Basel II Framework is a global capital regime that was introduced for authorised deposit-taking institutions (ADIs) in Australia on 1 January 2008.

The consultation package is a response to measures released in July 2009 by the Basel Committee on Banking Supervision to enhance the Basel II Framework by ensuring that the risks inherent in banks’ portfolios relating to trading activities, securitisations and exposures to off-balance sheet vehicles are better reflected in minimum capital requirements, risk management practices and accompanying public disclosures.

The proposed changes to prudential standards outlined in APRA’s discussion paper include:

• higher capital requirements to capture the credit risk of complex trading activities and the introduction of a stressed value-at-risk (VaR) requirement;
• higher risk-weights for so-called ‘resecuritisation’ exposures to better reflect the risk inherent in these products, and increased credit conversion factors for short-term liquidity facilities provided to off-balance sheet conduits;
• guidance in relation to valuation practices and capture of off-balance sheet and securitisation activities; and
• increased disclosure requirements for securitisations and off-balance sheet exposures.

APRA is also taking the opportunity to propose other amendments to its capital adequacy requirements for ADIs to clarify existing provisions.

APRA Chairman Dr John Laker said the proposed changes are not expected to have a significant impact on ADIs. ‘APRA supports the Basel Committee’s measures and agrees that greater international consistency in prudential regulation, promoted by the Leaders of the G20, will strengthen Australia’s prudential framework’.

Subject to industry feedback and international supervisory developments, APRA will release draft reporting standards and forms in the first quarter of 2010 for consultation. APRA intends to issue final prudential standards, PPGs and reporting requirements giving effect to these enhancements in mid 2010. The discussion paper can be found on the APRA website.

The proposals in this discussion paper do not relate to the Basel Committee’s comprehensive reform package on capital, set out in its consultation document Strengthening the resilience of the banking sector released on 17 December 2009.