The development of harmonised standards for ADIs has been an important goal for the Australian Prudential Regulation Authority (APRA) since it assumed responsibility for the supervision of all authorised deposit-taking institutions (ADIs) in July 1999. The application of consistent supervisory standards across these institutions, and more generally across institutional boundaries where risks are similar, was a central tenet of the Financial System (Wallis) Inquiry recommendations.

Against this background, APRA today released 10 harmonised prudential standards for all ADIs. These prudential standards and associated guidance notes establish the minimum prudential standards that ADIs are required to observe. They cover capital, liquidity, credit quality, large exposures, equity associations and audit arrangements.

Over the past six months, APRA has consulted extensively with industry on the proposed standards and guidance notes. When the period for comment closed in June 2000, over 120 submissions from ADIs, industry groups and others had been received, and many meetings were held with institutions and industry groups. In general, there was strong support for the development of a single set of harmonised standards for all ADIs. Not surprisingly, some of the draft proposals were also contentious - for example, the proposals to impose new large exposures limits on ADIs in advance of further work on the APRA conglomerates project; the treatment of general provisions and future income tax benefits; and the definition of high quality liquid assets.

We have now refined the standards and guidance notes in a number of areas. Brief details of the new standards, and their features, are set out in the attached schedule.

The standards will take effect from 1 October 2000. In most cases, they will not impose any new requirements on institutions. In other cases, changes will be necessary. In the latter case, APRA will be agreeing on transition periods with institutions, extending as long as five years in some instances, to facilitate compliance with the new regime. These arrangements will be set out in letters to ADIs. Institutions should discuss these details and the transition arrangements with their supervisory contact points in APRA.

The preserved prudential statements for banks and the transition prudential standards for building societies, credit unions and special service providers, with the exception of Prudential Statement B1 on Ownership and Control of Banks, and the sections of the transition standards on service contracts, data risk and operations risk, will cease to be operative from 1 October 2000.

The standards and guidance notes have been provided to ADIs in CD-ROMs. They are also available on the APRA website.

Schedule of ADI Standards

• APS 110 - Capital Adequacy - outlines the overall framework adopted by APRA to assess the capital adequacy of locally incorporated ADIs.
• APS 111 - Capital Adequacy: Measurement of Capital - stipulates the qualifying criteria for various types of Tier 1 and Tier 2 capital elements for inclusion in an ADIs capital base for capital adequacy purposes.
• APS 112 - Capital Adequacy: Credit Risk - prescribes the manner in which on- and off-balance sheet credit exposures are risk weighted for capital adequacy purposes.
• APS 113 - Capital Adequacy: Market Risk - details the alternative approaches for ADIs to manage and measure the risks associated with potential movements in market prices. ADIs may adopt an internal model or use the standard method to calculate capital requirements to cover market risks in their trading book.
• APS 120 - Funds Management and Securitisation - lays down the prudential requirements for ADIs involved in funds management and securitisation activities to ensure that the risks arising from these activities are prudently managed.
• APS 210 - Liquidity - sets out alternative approaches for ADIs to monitor and control liquidity risk. The approaches involve either putting in place strategies to manage liquidity under different scenarios or maintaining minimum holdings of high quality liquid assets.
• APS 220 - Credit Quality - sets out the prudential requirements for monitoring credit risk (or asset quality) to ensure that ADIs adopt prudent practices with respect to the measurement and reporting of, and provisioning for, impaired assets.
• APS 221 - Large Exposures - retains the existing prudential requirements for ADI groups in their management of large credit exposures to individual counterparties or groups of related counterparties.
• APS 222 - Equity Associations - sets out the prudential requirements for ADIs in respect of their equity associations and dealings with subsidiaries or associates.
• APS 310 - Audit and Related Arrangements for Prudential Reporting - establishes the tripartite arrangements between APRA, an ADI and its external auditor.

For further information contact:

Brian Gray
Executive General Manager
Policy, Research and Consulting
(02) 9210 3141