Download the Prudential Standard (PDF 149KB)

The Australian Prudential Regulation Authority (APRA) today released for industry comment a draft prudential standard on Credit Quality for all Authorised Deposit-taking Institutions (ADIs). This is the second in a series of harmonised standards covering ADIs. The first draft standard, on Liquidity Management, was issued in December 1999. As noted at the time, APRA aims to replace the Prudential Statements previously issued by the Reserve Bank (for banks) and prudential standards preserved from the Financial Institution (FI) Scheme (for building societies, credit unions and special service providers) with a single set of Banking Act prudential standards for all ADIs by the middle of 2000.

The draft standard released today seeks to ensure that all ADIs control credit risk effectively by adopting prudent practices with respect to the measurement and reporting of, and provisioning for, impaired assets. The standard:

• emphasises the need for consistency of approach to the measurement of credit and asset quality;
• provides for the use of alternative approaches to risk measurement and provisioning by ADIs depending on the nature, scale and complexity of their activities; and
• is consistent with Accounting Standard AASB 1032 - Specific Disclosures by Financial Institutions. ADIs which report in accordance with the harmonised standard will meet public disclosure requirements.

The draft standard on Credit Quality will replace the Prudential Statement on Asset Quality (PS L1), the Statutory provisioning section of the FI Scheme prudential standard on Public Reporting, as well as the FI Scheme Practice & Interpretative Notes on Restructured Loans, Valuation Practice and Collateral Security.

All ADIs will be deemed compliant when the new harmonised standard comes into effect. Where institutions have to adjust to fully meet the requirements of the standard, adequate transition periods will be allowed. We will actively encourage institutions applying the prescribed provisioning framework, outlined in the draft standard and associated guidance notes, to upgrade over time to a more sophisticated approach to their credit management.

APRA welcomes general comments on the proposed standard. We seek comments, in particular, on the proposed application of a general provision to all ADIs (the general provision will be eligible as capital for capital adequacy purposes) and the proposal for more widespread use of credit risk grading systems by ADIs.

The draft Credit Quality standard, and accompanying notes, as well as PS L1 and the FI Scheme prudential standard and practice & interpretative notes, are available on the APRA website, www.apra.gov.au

Please send comments on the proposed Credit Quality standard and guidance notes by 20 April 2000 to:

Mr Brian Gray
Executive General Manager
Policy, Research and Consulting
Australian Prudential Regulation Authority
GPO Box 9836
Sydney NSW 2001

Alternatively, email ADIstandards.creditquality@apra.gov.au