The Australian Prudential Regulation Authority (APRA) today released the second of two discussion papers setting out its proposed prudential response to the adoption of International Financial Reporting Standards (IFRS) by APRA-regulated institutions. This paper deals with the treatment of eligible Tier 1 capital instruments and securitisation for authorised deposit-taking institutions (ADIs) and general insurers.

APRA is proposing to de-couple the definition of capital instruments eligible for Tier 1 capital from Australian accounting standards. At the same time, it is proposing to harmonise its approach to innovative capital instruments with the decisions of the Basel Committee on Banking Supervision and regulatory practice in major jurisdictions.

APRA has also taken the opportunity to introduce more flexibility into its approach to innovative capital by allowing innovative Tier 1 capital instruments to be issued directly and removing the requirement that directly issued instruments be subject to mandatory conversion. These changes will allow mutually owned institutions, such as building societies and credit unions, greater access to capital.

APRA is also proposing to de-couple the assessment of securitised assets for capital adequacy purposes from the accounting treatment of these assets.

APRA’s Chairman, Dr John Laker, said that while APRA’s objective is to align prudential and reporting standards with Australian accounting standards to the extent possible, there are sound reasons for departure on these two areas.

“In shaping its approach, nonetheless, APRA is seeking to ensure that adequate levels of high quality capital underpin the financial position of ADIs and general insurers”, he said.

APRA welcomes comments on this discussion paper, which can be sent to ifrs@apra.gov.au by Friday 28 October 2005.

A copy of the paper is available at: General insurance: http://www.apra.gov.au/General/Other-Information-for-GIs.cfm Authorised deposit-taking institutions: http://www.apra.gov.au/adi/Other-Information-for-ADIs.cfm

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.