The Australian Prudential Regulation Authority (APRA) today released a discussion paper that proposes an improved capital framework for lenders mortgage insurers (LMIs). APRA is also proposing a tightening of the prudential rules governing the 50 per cent capital concession available to authorised deposit‑taking institutions (ADIs) on mortgage‑insured loans.

The core elements of the proposed capital framework for LMIs include:

• a new, more risk-sensitive regulatory capital model for the industry; and
  
• a significant increase in the minimum regulatory capital requirement applicable to LMIs.

APRA Chairman, Dr John Laker, said that the proposed changes would enhance the industry’s ability to withstand a substantial increase in housing loan defaults and losses without a material deterioration in prudential soundness.

“The industry currently operates at more than double the current minimum regulatory capital requirements and APRA expects that most industry participants will be able to satisfy the proposed requirements with some strengthening of reinsurance arrangements and/or increases in capital,” he said.

APRA also proposes to tighten the eligibility requirements for capital concessions granted to ADIs for transferring the risk of borrower default to LMIs.

Dr Laker said that APRA will continue to allow the capital concession when an ADI takes out LMI cover, provided that cover is with an LMI that meets APRA’s requirements, including an authorised captive of the ADI, and the LMI has no recourse to the ADI itself.

APRA has also requested comments on its proposals for improving reporting requirements for LMIs, particularly regarding analysis of their risk exposures, capital position and available reinsurance cover. The discussion paper is available at: http://www.apra.gov.au/RePEc/RePEcDocs/Archive/discussion_papers/dp0014.pdf

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.APRA is funded largely by the industries that it supervises. It was established on 1 July 1998.APRA currently supervises institutions holding approximately $1.8 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.