Glossary
| Term | Definition |
|---|---|
| ADI | Authorised deposit-taking institution |
| APRA | Australian Prudential Regulation Authority |
| APG 112 | Prudential Practice Guide APG 112 Capital Adequacy: Standardised Approach to Credit Risk |
| APS 110 | Prudential Standard APS 110 Capital Adequacy |
| APS 112 | Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk |
| APS 113 | Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk |
| AT1 Capital | Additional Tier 1 Capital |
| CET1 Capital | Common Equity Tier 1 Capital |
| IRB approach | Internal ratings-based approach to credit risk as defined in APS 113 |
| LGD | Loss given default |
| Standardised approach | Standardised approach to credit risk as defined in APS 112 |
Executive summary
In March 2026, APRA committed to consult on reforms to bank capital and liquidity settings. These reforms aim to better support APRA’s mandate to balance safety, efficiency and competition in promoting financial system stability.1 The reforms will help ensure the Australian banking system is well-positioned to withstand future shocks, responsive to evolving economic and financial conditions, and able to continue supporting households and businesses through the cycle.
APRA is progressing this package of reforms through three workstreams that address credit risk capital, liquidity risk and market risk capital. This paper begins consultation on workstream 1 on credit risk capital. We intend to consult on liquidity risk and market risk capital during the next twelve months. Taken together, APRA expects this package will be cost neutral and strengthen the financial resilience of Australian ADIs, while supporting lending to productive sectors with proportional outcomes across the banking sector.
Credit risk capital package
Capital remains the cornerstone of financial safety and system stability. Australia’s capital framework is built on the principle that ADIs should maintain ‘unquestionably strong’ capital, in line with the 2014 Financial System Inquiry (FSI).2 The FSI concluded that such settings would deliver a strong net benefit to taxpayers and the broader economy, given Australia’s structural vulnerabilities - significant concentration in residential mortgages, high household indebtedness, and reliance by larger ADIs on offshore funding. These features increase sensitivity to global market conditions and investor sentiment, necessitating a capital framework calibrated to domestic conditions. This has materially strengthened the resilience of Australia’s financial system.
Within the framework of ‘unquestionably strong’ capital, there are now opportunities for targeted, risk-sensitive adjustments that could improve the efficiency of the prudential framework and support productivity without compromising core prudential objectives. This is consistent with APRA’s periodic reviews to ensure the prudential framework is fit for purpose.
This paper outlines proposals to make credit risk weights for selected forms of corporate lending more granular and risk-sensitive under the standardised approach. The key proposals include:
- Infrastructure lending – to allow a lower risk weight for large domestic public infrastructure exposures.
- Unrated corporate lending – to allow a lower risk weight for high-quality unrated corporate exposures subject to certain criteria.
- Land acquisition, development and construction (ADC) lending – to adjust criteria to allow for more exposures to qualify for the lower 100 per cent risk weight for residential property development.
This consultation is deliberately targeted, focusing on risk-sensitive adjustments that support sustainable lending, business investment and productivity. APRA’s proposed approach remains consistent with the principle of maintaining ‘unquestionably strong’ capital. APRA expects the changes will provide more flexibility for internal ratings-based (IRB) ADIs to lend under the standardised floor, which otherwise can limit the capital benefit that these ADIs derive from using internal models to estimate risk. Where proposals result in a reduction in capital, ADIs would have greater capacity to deploy released capital in a manner that supports broader economic outcomes, while maintaining appropriate credit risk management.
Next steps
The following figure provides APRA’s indicative consultation roadmap consistent with APRA’s March announcement.
Figure 1 - APRA’s indicative consultation roadmap
APRA invites written submissions in response to this Consultation paper on workstream 1 on credit risk capital by 7 September 2026 and intends to finalise changes in the second half of 2026, for a proposed effective date of 1 April 2027.
Chapter 1 – Introduction
Australia’s evolving capital framework
APRA periodically reviews its prudential settings to ensure the framework remains fit for purpose and responsive to evolving risks and market practices. Workstream 1 on credit risk capital forms part of this periodic review process and the evolution of APRA’s capital framework in line with APRA’s ‘getting the balance right’ strategic objective.
A continued commitment to an ‘unquestionably strong’ capital framework
Australia’s ‘unquestionably strong’ capital framework ensures ADIs hold enough capital to absorb potential losses and continue to provide critical functions to the Australian economy during periods of stress. APRA’s commitment to ‘unquestionably strong’ capital remains particularly important amid heightened economic and geopolitical risks. In APRA’s view, the ‘unquestionably strong’ capital approach remains appropriate, based on system-wide impacts of capital levels, stress testing outcomes, and potential credit rating implications. Despite relatively high Common Equity Tier 1 (CET1) Capital requirements, bank returns are broadly in line with international peers, capital does not appear to constrain lending, and credit remains readily available. Unquestionably strong capital also supports banks’ cost of funding as it reduces their risk profile to investors. APRA’s approach is further balanced by relatively moderate resolution capital requirements and the absence of a pre-funded deposit insurance scheme, reflecting the view that strong capital supports a more stable operating environment for the Financial Claims Scheme.
Within the framework of ‘unquestionably strong’ capital, APRA has made a number of changes to enhance the Australian prudential capital framework since the FSI, including implementing the internationally agreed Basel III framework developed by the Basel Committee on Banking Supervision3 and removing Additional Tier 1 (AT1) Capital from the framework4. APRA also made capital adjustments in 2024 to provide improved risk differentiation and address specific implementation issues raised by industry. Figure 2 provides a timeline of selected capital reforms undertaken by APRA.
Figure 2 – Selected key capital reforms ![]()
APRA also continues to assess its capital settings against international peers, noting that peer regulators are similarly assessing prudential settings and recalibrating frameworks, including for Basel III implementation.
Targeted risk-sensitive adjustments to credit risk capital
APRA’s current review of capital settings has focused on embedding its ‘getting the balance right’ strategic objective, including identifying opportunities to reduce regulatory complexity and burden without unduly increasing risk.
Targeted changes to capital requirements can be complex, with a risk of unintended consequences if they are not carefully considered. Recalibrating credit risk capital requirements without a measured and consistent approach could distort competition or incentivise lending that is not commensurate with the underlying risk.
APRA has canvassed a range of potential policy options with stakeholders, applying rigour in using guiding principles and estimating preliminary capital impacts. Several options have been discussed with ADIs and industry association bodies - APRA has welcomed this engagement with industry. The guiding principles, shown in Figure 3, have supported a consistent and rigorous assessment of policy options. These guiding principles are useful to help APRA assess the suitability of potential policy options.
Figure 3 - Guiding principles for policy options
Alongside these guiding principles, APRA considered the impact of a range of policy options on overall capital levels to ensure any changes continue to support Australia’s ‘unquestionably strong’ capital settings.
This process identified three targeted amendments to the standardised capital framework to increase risk sensitivity and better align requirements with underlying risk:
- Infrastructure – allowing a lower risk weight for large domestic public infrastructure exposures.
- Unrated corporates – allowing a lower risk weight for high-quality unrated corporate exposures subject to certain criteria.
- Land acquisition, development and construction (ADC) – adjusting criteria to allow for more exposures to qualify for the lower 100 per cent risk weight for residential property development.
In combination, APRA expects these measures to increase ADIs’ lending capacity and support investment, while remaining consistent with an ‘unquestionably strong’, risk-based capital framework. The changes will also provide more flexibility for IRB ADIs that are currently bound by the standardised floor. The standardised floor restricts the capital benefit that IRB ADIs can access from using internal models to estimate risks to 72.5 per cent of the risk-weighted assets calculated using the standardised approach.5
Chapter 2 of this consultation paper provides details on the proposed capital changes and how APRA intends to implement them.
Chapter 2 – Risk-sensitive capital changes
This chapter sets out how APRA proposes to make risk-sensitive capital changes in credit risk capital requirements. APRA will undertake a Quantitative Impact Study (QIS) to inform the calibration of the proposed changes to credit risk capital settings and to understand the impacts on ADIs. APRA will contact IRB and selected other ADIs to progress the QIS.
Risk weight for large domestic public infrastructure exposures
Currently under the IRB approach, borrowers that operate large domestic public infrastructure assets or utilities that provide essential services to the economy may receive a concessional loss given default (LGD), designed to align with their risk characteristics while supporting domestic infrastructure development (Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113), paragraph 10 of Attachment B). However, a similar risk weight adjustment is not available under the standardised approach. This means that, at present, exposures to such operators are mostly risk weighted in accordance with paragraphs 19 and 25 of Attachment B to APS 112 with the following risk weights:
| Credit rating grade | 1 | 2 | 3 | 4 | 5 | 6 | Unrated |
|---|---|---|---|---|---|---|---|
| Risk weight (%) | 20 | 50 | 75 | 100 | 150 | 150 | 85/100/110 |
Proposed changes in paragraph 20 of Attachment B to draft APS 112
To implement a similar concession under the standardised approach, APRA is proposing to adopt domestic public sector entity (PSE) risk weights for eligible large domestic public infrastructure or utility operators. Standardised risk weights for domestic PSEs are set out in paragraph 6 of Attachment B to APS 112.
| Credit rating grade | 1 | 2 | 3 | 4 | 5 | 6 | Unrated |
|---|---|---|---|---|---|---|---|
| Risk weight (%) | 20 | 50 | 50 | 100 | 100 | 150 | 50 |
APRA considers that applying domestic PSE risk weights would:
- preserve risk sensitivity;
- better reflect the risk characteristics of government-linked entities, including large public infrastructure operators;
- provide appropriate capital relief for unrated large public infrastructure operators; and
- increase ADI capacity to invest in assets that boost long-term productive capacity and support economic activity.
Risk weight for unrated corporate (non-SME) borrowers
As part of the June 2024 minor updates to the ADI capital framework6, APRA made changes to better reflect the underlying risk of unrated corporate (non-SME) borrowers. This involved introducing risk weights to allow banks to categorise borrowers as investment grade (85 per cent) or non-investment grade (110 per cent). Entities that do not have an approved methodology to categorise borrowers continue to apply a 100 per cent risk weight.
Proposed changes in paragraph 26 of Attachment B to draft APS 112
In response to industry feedback and greater clarity on approaches of international peer regulators, APRA proposes to introduce an additional risk weight of 65 per cent to better differentiate genuinely stronger unrated borrowers (risk‑graded as equivalent to an A- credit rating grade or better) from other investment grade borrowers. The proposed updated risk weights for categorising unrated corporates are set out below.
| Unrated corporates | High-quality investment grade | Other investment grade | Non-investment grade |
|---|---|---|---|
| Risk weight (%) | 65 | 85 | 110 |
The proposed graduated approach is intended to improve risk sensitivity while avoiding a large capital cliff effect between credit rating grades. APRA expects this could lower the cost of credit for stronger unrated borrowers, enabling ADIs the opportunity to support businesses to invest in expansion, innovation and efficiency‑enhancing activities.
Eligibility of land acquisition, development and construction (ADC) exposures for a 100 per cent risk weight
APRA currently allows ADIs to apply a 100 per cent risk weight to higher quality residential development exposures that meet a set of prescribed criteria. A 150 per cent risk weight applies for exposures that do not meet the criteria. APRA has considered industry feedback that the current criteria to apply the 100 per cent risk weight are too restrictive, resulting in some otherwise high-quality residential development exposures not being eligible.
APRA has therefore re-evaluated the criteria, taking into account the alignment of existing quantitative thresholds with the underlying risk of exposures; market developments, including the growth of build-to-let structures; banks’ current underwriting policies in relation to pre-sales and leverage; and the approaches taken by international peer regulators.
Proposed changes to paragraph 29 of Attachment A to draft APS 112
APRA proposes to lower the qualifying pre-sales requirement for the underlying property from 100 per cent of the total debt to 50 per cent of the total debt.
For built-to-let structures, APRA proposes to replace the pre-sales requirement with a new pre-lease requirement. For a development that is partly built-for-sale and partly built-to-let, qualifying pre-sales and pre-lease requirements will apply concurrently to the respective proportion of the development. APRA invites submissions on the appropriate calibration of pre-lease coverage and the measurement unit.
The proposed change is expected to increase the amount of residential developments eligible for the 100 per cent risk weight, reducing the cost of capital for these developments and increasing bank capacity to support the supply of housing.
Prudential Practice Guide and reporting changes
APRA is proposing changes to Prudential Practice Guide APG 112 Capital Adequacy: Standardised Approach to Credit Risk (APG 112) to provide guidance on the proposals above.
APRA is also proposing changes to Reporting Standard ARS 112.0 Capital Adequacy: Standardised Approach to Credit Risk (ARS 112.0) to implement the proposals above. The key change is to include a new category for unrated exposures subject to a 65 per cent risk weight.
APRA is also taking this opportunity to include consequential changes to ARS 112.0 relating to the removal of AT1 Capital. APRA will shortly be consulting on other consequential changes to APS 112 and APS 113 due to the removal of AT1 Capital as part of its minor framework updates process.
Chapter 3 – Consultation and next steps
Following consultation, APRA plans to finalise amendments to the prudential standard, prudential practice guide and reporting standard in the second half of 2026.
| Timeline for reform | |
|---|---|
| Submissions deadline | 7 September 2026 |
| Release final APS 112, ARS 112.0, APG 112 | Late 2026 |
| Implementation | 1 April 2027 |
Consultation questions
APRA welcomes general feedback on the issues raised in this Consultation paper. APRA also invites specific advice on the following questions.
Questions
1. What estimated cost savings would result from these proposals?
2. Can you describe:
- likely changes to bank lending behaviour as a result of these proposals; and
- the business opportunities these proposals may provide?
3. Is 1 April 2027 an appropriate implementation date?
4. For land acquisition, development and construction exposures secured by built-to-let residential property:
- what minimum level of pre-lease coverage would be appropriate; and
- what measurement basis should be used to assess pre-lease coverage (e.g. proportion of units, number of contracts, or value-based measures)?
5. Is there any other specific feedback on the proposals detailed in Chapter 2?
Requests for submissions
Written submissions should be sent to policydevelopment@apra.gov.au by 7 September 2026 and addressed to:
General Manager, Policy
Policy and Advice Division
Australian Prudential Regulation Authority