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Banking COVID-19 frequently asked questions

APRA has published the following frequently asked questions (FAQs) to provide authorised deposit-taking institutions (ADIs) with up-to-date guidance on supervisors’ expectations, during the period of disruption driven by COVID-19.

These FAQs will be updated periodically over the coming weeks and months, and we encourage ADIs to check the page regularly. APRA announcements in response to COVID-19 are available here.

Updated: 18 May 2020

Loan repayment deferrals

1. What is the capital treatment for loans on repayment deferrals?

Many banks are offering small businesses and other borrowers the option to defer their repayments for a specified period. To support this, APRA has provided a regulatory capital approach for these loans. This sets out that, over the next six months, banks do not need to treat the period of the repayment deferral as a period of arrears for capital purposes.

2. Which loans are eligible for this capital treatment?

This regulatory capital approach can be applied to a broad class of otherwise performing loans on which ADIs grant repayments deferrals. This includes loans that are less than 90 days past due and not impaired at the time deferral was granted. 

For small business loans, the regulatory capital approach applies where ADIs offer a repayment deferral of up to six months. Small business loans are defined for this purpose as total loan facilities up to $10 million.

For other credit facilities the regulatory capital approach applies for an initial deferral period of three months, which may be extended for another three months if considered appropriate. 

3. Do ADIs need to review loans at the three month point?

With the exception of small business loans (see question 2 above) ADIs should conduct a check at the end of the initial three month deferral period. The check should determine whether there is any objective evidence that it is no longer appropriate to maintain the regulatory capital approach, given for example more permanent changes in the borrower’s financial circumstances. ADIs should not be avoiding recognition of losses where inevitable. 

This check is not expected to involve a full credit risk assessment, but nor should it be an automatic decision to extend the regulatory capital approach. ADIs can use information gathered through proprietary sources, credit reporting agencies and inquiries with borrowers where necessary to inform the check. There should also be a record to evidence the check.

4. What should ADIs be publicly disclosing and reporting on repayment deferrals?

ADIs should publicly disclose the nature and terms of any repayment deferrals given to a broad class of loans and the volume of loans to which they are applied. ADIs should also closely monitor the portfolio credit risk of this cohort of loans, and are required to report to APRA information on the volume and risk profile of this segment of the portfolio.

Residential mortgage lending 

5. What are APRA’s expectations on serviceability assessments for borrowers making changes to loan conditions?

As outlined in Prudential Practice Guide APG 223 – Residential Mortgage lending (APG 223) paragraph 25, APRA’s guidance on better practice in residential mortgage lending has been that there should be a full serviceability assessment for borrowers where there is a material change in loan conditions.

In the current environment, APRA acknowledges that there may be operational challenges for ADIs in evaluating the long-term impact of economic stress on borrowers due to COVID-19. However, this should not prevent changes to loan conditions where these are otherwise assessed to be prudent.

Over the next six months period, APRA therefore accepts that some ADIs may not be able to complete a full serviceability assessment for borrowers seeking a change in their loan conditions. Such changes may include converting from principal and interest to interest only, or for the extension of a loan term. Where changes to loan conditions are made that result in an interest-only period being granted without a normal serviceability assessment, APRA expects that a reasonable period for such an arrangement would not exceed 12 months. 

6. How should ASIC’s recent clarifications on responsible lending be interpreted in regards to APRA’s guidance in APG 223? 

ASIC has confirmed that responsible lending obligations apply to new lending or increases to contractual credit limits for existing lending, and should not be considered by lenders as a barrier to making other appropriate changes to the terms of existing loans in response to hardship situations.1 
 
Appropriately assessing a borrower’s ability to service and repay a loan continues to be an important component of new residential mortgage lending. APRA notes ASIC’s clarifications on the range of circumstances that lenders can consider when assessing a borrower’s current and likely future capacity to meet repayment obligations. This is consistent with APG 223 (paragraph 38), which states that, as part of its serviceability assessment, an ADI would typically assess and verify a borrower’s income and expenses having regard to the particular circumstances of the borrower.

Footnote:

1 ASIC responds to lenders’ request for clarification on lending during the COVID-19 pandemic, 29 April 2020.

Market risk capital requirements

7. From mid-March to mid-April 2020, markets experienced heightened levels of volatility across several asset classes due to the effects of COVID-19. This is expected to lead to increases in capital requirements for ADIs that use internal models to determine their capital requirement under APS 116 Capital Adequacy: Market Risk. What are APRA’s expectations for reflecting this in capital requirements?

An inherent part of the APS 116 Market Risk framework is that where there is increased risk, there is an increased capital requirement. Increased volatility experienced during March and April 2020 is consequently and appropriately expected to result in increased market risk capital. 

One aspect of the market risk internal model capital framework relates to model reliability being confirmed through back-testing of model results to actual outcomes. Where model reliability falls, capital requirements are appropriately adjusted. Through mid-March to mid-April 2020, internal modelling banks are likely to have experienced an unusually high number of VaR back-testing exceptions. APRA’s view is that many of the exceptions experienced during that period are not evidence of deficiencies in an ADI’s model.

Accordingly, APRA will allow modelling ADIs to: 

  • disregard back-testing exceptions that occurred in the months of March and April 2020 in determining a plus factor for an ADI (under paragraph 85 of APS 116); and
  • disregard those exceptions in determining whether to apply a plus factor of one (under paragraph 86 of APS 116).

APRA believes this measure will prevent capital requirements from increasing in a way that is not consistent with the intent of the prudential standard. Modelling ADIs must still include exceptions from March and April 2020 in the number that is compared to a threshold of 10 exceptions (under paragraph 86 of APS 116) to determine whether to submit an analysis of exceptions to APRA.

 

These FAQs are published for discussion purposes only. The content of these FAQs is not legal advice. Users are encouraged to obtain professional advice about the application of any legislation or prudential standard to their particular circumstances. Users should exercise their own skill and care when relying on any material contained in the FAQs. APRA disclaims any liability for any loss or damage arising out of any use of or reliance on these FAQs. The FAQs may include links to external websites that are beyond APRA’s control. APRA accepts no responsibility for the accuracy, completeness or currency of the content of these FAQs.