The Australian Prudential Regulation Authority (APRA) today released its proposed approach to the treatment of market risk under the Basel II capital adequacy regime, known as the Basel II Framework.

APRA has released a discussion paper, draft prudential standard and a prudential practice guide that set out proposed refinements to APRA’s current approach to market risk for authorised deposit-taking institutions (ADIs). The draft prudential standard is intended to replace the current Prudential Standard APS 113 Capital Adequacy: Market Risk.

The proposed approach better aligns ADI market risk capital requirements with the Basel II Framework, but preserves APRA’s requirement that ADIs have in place a framework to measure, manage, and monitor market risk that is commensurate with the nature, scale and complexity of their operations.

APRA chairman Dr John Laker said the refinements had been guided by the need to bring existing capital requirements into line with the market risk principles in the Framework and ensure consistency with the revisions for credit risk under Basel II.

“These amendments recognise the rapid expansion in the range and volume of instruments traded and potential changes in ADIs’ market risk profiles on their trading and non-trading books.”

As is currently the case, an ADI must use the standard method of market risk measurement or obtain APRA’s approval to use its own risk measurement model. APRA also requires an ADI using the advanced approaches to measuring credit risk and operational risk to hold regulatory capital against its interest rate risk in the banking book, which is covered by a separate prudential standard.

The suite of Basel II prudential standards is expected to be finalised in the second half of 2007. The new Basel II capital adequacy regime will come into force in Australia on 1 January 2008.

Comments on the discussion paper and draft Prudential Standard APS 116 Capital Adequacy: Market Risk are invited by 5 September 2007 and can be emailed to basel2@apra.gov.au.

Both documents are available on APRA's website at www.apra.gov.au/ADI/Basel-II-implementation-in-Australia.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 $2.5 trillion in assets for 20 million Australian depositors, policyholders and superannuation fund members.

Media and industry inquiries only:
Andrew McCutcheon, Public Affairs Manager
Australian Prudential Regulation Authority
Telephone: 02 9210 3143
Mobile: 0417 528 660

All other inquiries:
APRA Contact Centre 1300 131 060