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APRA responds to submissions on ADI leverage ratio, and extends timeline for broader capital framework reforms

Tuesday 27 November 2018

The Australian Prudential Regulation Authority (APRA) today released its response to submissions on the introduction of a leverage ratio requirement for authorised deposit-taking institutions (ADIs).

APRA also announced that it is proposing to align the implementation of a range of revisions to the capital framework for ADIs, including the proposed leverage ratio, with the timeline set out in the Basel III framework.
The leverage ratio, which measures the proportion of an ADI’s assets that is funded through equity (capital) rather than debt, is designed to supplement risk-based capital requirements by providing stakeholders with an alternative perspective on ADIs’ capital strength.
APRA released proposals in February 2018 to incorporate a minimum leverage ratio within the ADI prudential framework. Most submissions broadly supported the introduction of a minimum leverage ratio, but raised concerns about the calibration of the minimum requirement and calculation methodology. In response, APRA has proposed to:
  • set the minimum requirement for ADIs using the internal ratings-based approach (IRB ADIs) to determining capital adequacy at 3.5 per cent, rather than 4 per cent;
  • keep the leverage ratio for ADIs that use the standardised approach to determine capital adequacy (standardised ADIs) at 3 per cent;
  • allow standardised ADIs to use Australian accounting standards, rather than the more complex Basel III methodology, to calculate certain parts of the ratio; and
  • require IRB ADIs to largely follow the Basel III methodology to calculate their leverage ratios.
ADIs’ leverage ratio requirements are outlined in the draft amended Prudential Standard APS 110 Capital Adequacy; APRA is also introducing a new reporting standard, ARS 110.1 Leverage Ratio. APRA is seeking industry feedback on the draft standards and invites interested parties to provide submissions by 22 February 2019.
Small ADIs that qualify for the simplified prudential framework – which is intended to introduce more proportionate and tailored prudential requirements for smaller and less complex ADIs – will be exempt from the leverage ratio requirements, but will still be required to report to APRA under ARS 110.1. Although still consulting on its final design, APRA is considering an eligibility threshold for the simplified framework of $15 billion in total assets, which will be complemented by other qualitative measures.
APRA is now proposing that revisions to the capital framework, initially outlined in February 2018,  will come into effect from 1 January 2022, the internationally agreed implementation date set by the Basel Committee on Banking Supervision. APRA had originally proposed an implementation date of 1 January 2021, but is proposing to revise this based on industry concerns about the business impact of moving ahead of international competitors.
Copies of the response paper and draft standards are available on APRA’s website at:
Capital framework

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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $7.7 trillion in assets for Australian depositors, policyholders and superannuation fund members.