APRA has written to banks today informing them of amendments to Prudential Statement C1 - Capital Adequacy of Banks. The amendments have the effect of permitting banks, in certain circumstances, to recognise bilateral close-out netting agreements for capital adequacy purposes. At this stage, the concession is restricted to banks off-balance sheet transactions and, to be eligible, banks must comply with the requirements set down in the revised guidelines.
The changes are consistent in all substantial respects with the requirements on bilateral netting set out by the Basel Committee on Banking Supervision in April 1995 and subsequently implemented by G-10 and a number of other countries. The new arrangements in Australia, which take effect from 30 September, follow the passage of the Payments System and Netting Act 1998 which provided greater legal certainty in the application of close-out netting agreements.
Previously, the capital adequacy guidelines permitted bilateral netting only in the specific case where novation agreements were in place. To be recognised under such arrangements, it was necessary that transactions between counterparties involved the same product type, currency and value date. Close-out netting agreements, on the other hand, apply netting of market-related transactions between a bank and counterparty across products, currencies and value dates.
The changes to the capital adequacy guidelines will benefit those banks active in market-related activities that have also entered into close-out netting agreements with counterparties. The effect will be to reduce the risk-weighted assets of those banks and consequently increase their capital ratios. The overall impact on individual bank capital ratios and the capital ratio for banking system as a whole is likely to be small.
The new requirements covering netting can be found in Paragraphs 95 to 131, and Attachment IX, of Prudential Statement C1. This can be found in the "Banks" section of APRA's web-site at www.apra.gov.au
For further information contact:
Brian Gray
Executive General Manager
Policy Research & Consulting
Tel: (02) 9210 3160
Fax: (02) 9210 3150
