The Australian Prudential Regulation Authority (APRA) today released a discussion paper and accompanying draft prudential standard and prudential practice guide on interest rate risk in the banking book (non-traded interest rate risk). This is the risk of loss in earnings or in the economic value of the banking book of an authorised deposit-taking institution (ADI) as a consequence of movements in interest rates.
The proposals form part of the Basel II capital adequacy regime and confirm APRA's decision to require ADIs seeking accreditation from APRA to use the advanced approaches to credit risk and operational risk also to hold specific regulatory capital against non-traded interest rate risk.
The main requirements of the draft standard are that relevant ADIs have in place a framework to measure, manage and monitor non-traded interest rate risk that is commensurate with the nature, scale and complexity of their operations, and seek approval from APRA to use an internal measurement model for determining the regulatory capital requirement for risk.
ADIs using the standardised Basel II approaches will not be required to hold specific regulatory capital for non-traded interest rate risk. APRA proposes to monitor these ADIs' exposure to such risk through quarterly reports and will, as at present, take this exposure into account when determining the overall regulatory capital requirement. In particular, ADIs that are identified from the reports as outliers will be expected to maintain a minimum capital ratio that reflects their non-traded interest rate risk.
The suite of Basel II prudential standards is expected to be finalised in 2007. The new Basel II capital adequacy regime will come into force on 1 January 2008.
Comments on the discussion paper, Implementation of the Basel II Capital Framework 5: Interest rate risk in the banking book, and draft prudential standard are invited by 30 June 2006 and can be emailed to basel2@apra.gov.au. Both documents are available on APRA's web site at http://www.apra.gov.au/ADI/Basel-II-implementation-in-Australia.cfm
APRA has previously released draft prudential standards on the standardised approaches to credit and operational risks, the internal ratings-based approach to credit risk and the advanced measurement approaches to operational risk. Some of the comments received on these draft prudential standards may be relevant to this latest draft standard.
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 $2.2 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.
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Australian Prudential Regulation Authority
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