The Australian Prudential Regulation Authority (APRA) today released for information its submission on the Basel Committee on Banking Supervisions second consultative package on proposed changes to the Basel Capital Accord. The current Accord guidelines have been the global benchmark for banks' capital adequacy for over a decade and, in Australia, are applied to all authorised deposit-taking institutions (ADIs) banks, building societies and credit unions.

The latest round of consultations forms part of a wide-ranging review of the Basel Accord prompted by developments in financial markets and risk management methods that have put increasing pressure on the current Accords relatively broad-brush approach.

In its submission, APRA supports measures such as the use of external and institutions internal credit risk ratings in calculating minimum capital requirements; the introduction of an explicit capital charge for operational risk; and the establishment of agreed international guidelines dealing with other aspects of capital adequacy regulation through the increased attention given to supervisory review and market disclosure.

Commenting on the submission, APRAs CEO, Graeme Thompson said:

"APRA welcomes the Basel Committees proposals for a more risk-sensitive approach to capital adequacy regulation and the good progress that has been made towards fleshing out the Committees initial proposals.

"However, some work to modify the proposals is still required. While we fully support the broad structure of the new Accord, APRA has commented and made recommendations on a range of matters that we believe need to be considered closely by the Basel Committee before the revised capital framework is finalised."

One of APRAs main concerns is the potential differential impact of the various calculation options that will be available to regulated institutions, depending on the sophistication of their risk management systems. While it is too early to assess fully the impact of the various operational risk proposals (which are still being developed), APRA has made strong recommendations to change the present proposals on credit risk. These include a lower risk weight for housing loans and revisions to the treatment of collateral under the internal ratings-based approaches.

APRAs submission follows extensive consultation with the industry. (A list of industry submissions received is contained in an attachment to APRAs submission.) In collaboration with a number of Australian ADIs, APRA is also participating in the Basel Committees global quantitative impact study on the effects of the proposals.

The Basel Committee is aiming to finalise most aspects of the new Accord by years end, though completion of some elements, notably the operational risk proposals, will take longer. APRA will continue to review the proposals as additional details are tabled for discussion.

For further information contact:

Wayne Byres General Manager, Risk Analysis and Research (02) 9210 3146 or wayne.byres@apra.gov.au