The Australian Prudential Regulation Authority (APRA) today released a discussion paper on its proposed approach to the supervisory review process under the new Basel II capital adequacy regime, known as the Basel II Framework.
The supervisory review process, or Pillar 2, is one of three mutually reinforcing pillars on which the Framework is based. The process is intended to ensure that locally incorporated authorised deposit-taking institutions (ADIs) have adequate capital to support all the risks in their business and to encourage ADIs to develop and use better risk management techniques in monitoring and managing their risks.
APRA Chairman Dr John Laker said that APRA's existing supervision framework is already largely consistent with Pillar 2.
"No separate Pillar 2 prudential standard is needed since ADIs' obligations and APRA's powers are already addressed in the revised draft version of Prudential Standard APS 110 Capital Adequacy," he said.
"However, Basel II has presented an excellent opportunity for APRA to articulate its expectations of ADIs and to use its risk assessment model as a basis for supervisory reviews."
Consistent with its existing processes for determining capital adequacy, APRA is proposing to set a prudential capital requirement (PCR) for each ADI, which must be met at all times. Subject to the minimum capital requirement of eight per cent established in the Framework, PCRs will be set at a level proportional to each ADIs overall risk profile.
A key requirement of Pillar 2 is that an ADI should develop, document and maintain a comprehensive internal capital adequacy assessment process (ICAAP), proportional to its operations and consistent with prudential requirements. The information provided by an ADI in its ICAAP is essential input into APRA's supervisory review and determination of the PCR.
In line with the Framework, APRA intends to apply a limit on reductions in regulatory capital for ADIs accredited to use the advanced Basel II approaches, relative to what would have applied had the current Basel Capital Accord continued in force. The limit will be 10 per cent in 2008 and this limit will be retained in 2009 pending a review of experience with the advanced Basel II approaches.
The Basel II Framework will come into force in Australia on 1 January 2008.
Comments on the discussion paper are invited by 26October 2007 and can be sent to basel2@apra.gov.au. The discussion paper is 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
