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APRA releases consultation to enhance capital adequacy for ADIs with subsidiaries

The Australian Prudential Regulation Authority (APRA) has released a response to submissions and consultation on proposed measures to enhance the capital adequacy of authorised deposit-taking institutions (ADIs).

The consultation package includes a response paper and revised draft standard, Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111). The revised draft standard is designed to: 

  • reinforce financial system resilience, with changes to the capital required to be held by ADIs for their banking and insurance subsidiaries;
  • promote simple and transparent capital issuance, through the removal of complex issuance structures such as special purpose vehicles; and
  • clarify various aspects of the standard, with additional technical information and updated guidance from the Basel Committee on Banking Supervision.

The revised capital treatment of ADIs’ equity investments in their subsidiaries is the most material change to APS 111. This revision will, in effect, increase the amount of capital required to support equity investments in large subsidiaries and reduce the amount required for small subsidiaries. This change is not expected to increase system capital requirements, though the impact will differ across individual ADIs. This proposed revision was consulted on in 2019 and is now being finalised.

The revised draft standard also contains further minor revisions for consultation which were not included as part of the 2019 consultation. These revisions include measures to clarify that Common Equity Tier 1 (CET1) capital is not permitted to have any unusual features that could undermine its role as the highest quality loss absorbing capital. 

The consultation period for these further minor revisions closes on 10 June 2021. APRA expects to finalise changes to APS 111 in the second half of 2021, with the revised standard coming into force from 1 January 2022. 

The response to submissions paper and revised draft APS 111 are available on the APRA website: Revisions to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital.

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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, mutuals, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding around $9 trillion in assets for Australian depositors, policyholders and superannuation fund members.