APRA proposes more accessible pathway to IRB accreditation for banks

The Australian Prudential Regulation Authority (APRA) has proposed a simpler, clearer and more streamlined pathway for banks to become accredited to use the internal ratings-based (IRB) approach to calculating credit risk-weighted assets.

The IRB method is one of two approaches banks can use to calculate risk-weighted assets, which determines the amount of regulatory capital they need to hold for credit risk.¹

While the vast majority of banks use the standardised approach, APRA has approved six of the largest banks to use the IRB approach.²

The IRB approach can provide a small financial benefit to banks by marginally reducing their capital requirements. However, accreditation to use the IRB approach requires banks to demonstrate a high level of sophistication in their risk management practices that has historically been too resource-intensive for most banks to achieve.

Noting that some medium-sized banks have expressed interest in obtaining IRB accreditation, APRA is seeking to make the pathway to IRB accreditation more accessible for these banks. This was one of the commitments APRA made as part of the recent Council of Financial Regulators’ and Australian Competition and Consumer Commission’s Review into Small and Medium-sized Banks.

In a consultation paper released today, APRA has proposed a range of changes to the IRB accreditation pathway designed to help more banks access the IRB approach.

APRA Member Therese McCarthy Hockey said the proposed changes are further evidence of APRA’s commitment to “getting the balance right” in its regulatory settings.

“Capital is the cornerstone of every bank’s financial resilience so it’s essential banks can accurately align their capital requirements with the risks they face.

“For most banks, the simpler and more conservative standardised approach to calculating risk weighted assets is the most cost-effective way for them to do this. But we recognise that a cohort of mid-sized banks have told us that gaining IRB accreditation would help them compete more effectively with the largest banks, especially for home loans.

“While we don’t intend to drop our standards, the changes we are proposing today would improve the flexibility and transparency of the accreditation process, thereby supporting banks to more confidently plan, invest and transition, should they wish to,” Ms McCarthy Hockey said.

A consultation paper outlining the proposed changes is available here: A new pathway to internal ratings-based accreditation.
 

Footnotes

¹More information on the two approaches to calculating risk-weighted assets is available here: APRA Explains: Risk-weighted assets | APRA

² Banks accredited to use the IRB approach are the four major banks, Macquarie Bank and ING Bank Australia.