The Australian Prudential Regulation Authority (APRA) today released the first of a series of discussion papers on the implementation of the new Basel II capital adequacy regime, known as the Basel II Framework, in Australia. The paper deals with the ‘standardised’ approach to credit risk and proposes a new prudential standard in this area.

Most Australian banks, building societies and credit unions are likely to adopt the standardised approach to determine their regulatory capital requirements for credit risk. However, APRA expects larger banks, which in aggregate represent the majority of assets in the industry, to seek accreditation for the more sophisticated Basel II approaches. Prudential standards for these approaches will be issued for consultation shortly.

A full suite of prudential standards for the Basel II Framework will be released for consultation in coming months. APRA expects to issue a final version in early 2007, which will then be tabled in Parliament, and the new capital adequacy regime will come into force on 1 January 2008. The qualitative risk management requirements under the Basel II Framework will also be included in a single prudential standard on risk management, for release by APRA in 2006.

APRA’s Chairman, Dr John Laker, said that the Basel II Framework introduced a more risk‑sensitive regulatory capital regime that rewards stronger and more accurate risk management.

“APRA is working with the industry and other stakeholders to ensure that Australia’s authorised deposit-taking institutions remain soundly capitalised and are strengthened by the much improved arrangements in Basel II for linking regulatory capital requirements to the specific risks taken by each institution,” he said. “APRA also wants to ensure the fair and consistent implementation of the Basel II Framework in Australia.”

The discussion paper and draft standard, including the discretions APRA intends to exercise for the standardised approach to credit risk, are available on the APRA website at: http://www.apra.gov.au/ADI/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=8504
and http://www.apra.gov.au/Policy/Draft-Prudential-Standards-and-Guidance-Notes-for-Authorised-Deposit-Taking-Institutions.cfm

Comment on the documents is due no later than 30 September 2005. APRA has also finalised the majority of the discretions it intends to exercise for the internal rating-based (IRB) approach to credit risk and for securitisation. These are available on APRA’s website at: http://www.apra.gov.au/ADI/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=8502

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 $2.0 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.