The Australian Prudential Regulation Authority (APRA) today released revised criteria for authorised deposit‑taking institutions (ADIs) to qualify for the concessional risk‑weighting of residential mortgage lending for capital adequacy purposes.

The revised criteria ensure that the 50 per cent risk-weight applies only to residential mortgage lending by ADIs which have adequate procedures to gauge the ability of the borrower to meet repayment obligations and to assess independently critical information in respect of the borrower.

To be eligible for the concessional risk‑weighting, ADIs must also implement:

• policies for determining the marketability of residential properties offered as security;
  
• documented procedures regarding the valuation of properties; and
  
• processes for outsourcing any part of the credit assessment process to third parties.

APRA’s Chairman, Dr John Laker, said the current standard provided insufficient guidance on the criteria necessary to qualify for the concessional risk-weighting.

“In particular, it did not address recent product innovations in mortgage lending such as ‘low doc’ loans and loans originated via mortgage brokers and other third-party channels.”

APRA consulted extensively with ADIs and industry bodies in finalising the revised standard.

Dr Laker added: “The revised standard aims to ensure that the lending/credit policies of ADIs address the likelihood of increased risk in certain types of non‑conventional mortgage lending.”

The revised prudential standard covering changes to the risk-weighting of residential mortgage lending comes into effect from 1 October 2004, and will need to be reflected in reporting to APRA for the quarter ending on 31 December 2004.

A full copy of the prudential standard is available on APRA’s website:
http://www.apra.gov.au/policy/final_adi_standards/AGN112.1.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.