The Australian Prudential Regulation Authority (APRA) today announced the authorised deposit‑taking institutions (ADIs) that have been given approval to adopt, from 1 January 2008, the advanced approaches available under the Basel II Framework.
APRA released on 30 November 2007 the full suite of prudential standards that will give effect to the implementation of the Basel II Framework in Australia (see http://www.apra.gov.au/media-releases/07_55.cfm). The majority of ADIs will adopt the Basel II standardised approaches for credit and operational risk and are not subject to any approval process. APRA’s prior approval is required before an ADI may adopt the internal ratings‑based approach (IRB) for credit risk, at either the Foundation or Advanced level, and the advanced measurement approaches (AMA) for operational risk. An ADI must adopt both the IRB and AMA before it can use either approach to measure its capital adequacy requirement.
While the ADIs that have been given approval to adopt the IRB and AMA have met all the pre‑requisites, APRA is continuing to discuss a number of risk estimates and categorisations with each of the ADIs concerned. Until these discussions are completed, detailed analysis of the individual impacts of Basel II must be treated with caution. In any event, advanced ADIs are subject to a cap of 10 per cent in 2008 on any reduction in capital requirements from the Basel II changes. (This cap will be retained during 2009 pending a review of experience with the Basel II advanced approaches.) Any reductions may also be offset by the end of transitional arrangements for the introduction of International Financial Reporting Standards (IFRS) on 31 December 2007. Taking these various changes into account, and any further Pillar 2 adjustments which APRA is still to discuss with the ADIs concerned, changes to regulatory capital requirements for advanced ADIs are likely to be modest.
The following approvals have been granted from 1 January 2008:
Advanced IRB and AMA
• Australia and New Zealand Banking Group Limited
• Commonwealth Bank of Australia
• Westpac Banking Corporation
Foundation IRB and AMA
• Macquarie Bank Limited
AMA
• Bank of Western Australia Ltd
• National Australia Bank Limited
Two banks, Bank of Western Australia Ltd and National Australia Bank Limited, have submitted applications to adopt the Advanced IRB during 2008 and APRA has agreed to a request from them to remain on the existing capital arrangements (Basel I) for 2008.
One bank, St George Bank Limited, has submitted an application to adopt the Foundation IRB and AMA during 2008 and APRA has agreed to a request from it to remain on Basel I for 2008.
APRA Chairman Dr John Laker said that the process of applying for the Basel II advanced approaches had led to significant improvements in the risk management systems of the applicants. Risk estimates and the data on which they are built are more robust and systems are now more integrated. APRA has also seen improvements in the risk management information presented to boards and senior management, leading to better understanding of the risks to which each of the ADIs is exposed.
“Basel II is often referred to as a journey rather than a destination and the advanced ADIs, and APRA, still have work to do. However, those ADIs operating in global markets are now better equipped to meet the challenges of these markets as a consequence of the enhancements to their risk management associated with their preparations for Basel II”, he said.
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 $3 trillion in assets for 21 million Australian depositors, policyholders and superannuation fund members.
Media and industry inquiries only:
Stuart Snell, Head of Public Affairs
Australian Prudential Regulation Authority
Telephone: 02 9210 3384
Mobile: 0407 250 276
All other inquiries:
APRA Contact Centre 1300 131 060.
