The Australian Prudential Regulation Authority (APRA) has proposed updating its prudential standard on credit risk management requirements for authorised deposit-taking institutions (ADIs).
Credit risk refers to the possibility that a borrower will fail to meet their obligations to repay a loan, and is usually considered the single largest risk facing an ADI.
APRA has released a discussion paper proposing changes to Prudential Standard APS 220 Credit Quality (APS 220), which requires ADIs to control credit risk by adopting prudent credit risk management policies and procedures.
APS 220 was last substantially updated in 2006, and there has been significant evolution in credit risk practices since then, including more sophisticated analytical techniques and information systems. APRA’s plan to modernise the standard was prompted by its recent supervisory focus on credit standards, and also reflects contemporary credit risk management practices.
The discussion paper outlines APRA’s proposals in the following areas:
Credit risk management – The revised APS 220 broadens its coverage to include credit standards and the ongoing monitoring and management of an ADI’s credit portfolio in more detail. It also incorporates enhanced Board oversight of credit risk and the need for ADIs to maintain prudent credit risk practices over the entire credit life-cycle.
Credit standards – The revised APS 220 incorporate outcomes from APRA’s recent supervisory focus on credit standards and also addresses recommendation 1.12 from the Final Report of the Royal Commission in relation to the valuation of land taken as collateral by ADIs.
Asset classification and provisioning – The revised APS 220 provides a more consistent classification of credit exposures, by aligning recent accounting standard changes on loan provisioning requirements, as well as other guidance on credit related matters of the Basel Committee on Banking Supervision.
To better describe the purpose of the revised standard, APRA also proposes renaming it Prudential Standard APS 220 Credit Risk Management
The proposed reforms are due to be implemented from 1 July 2020, while an accompanying prudential practice guide (PPG) and revised reporting standards will be released for consultation later this year.
In a related development, APRA has also released a letter to industry expressing concerns related to ADIs’ increasing exposure to funding agreements with third party lenders, including peer to peer (P2P) lenders.
A copy of the letter to ADIs can be found on the APRA website at: https://www.apra.gov.au/letters-notes-advice-adis.
A copy of the discussion paper and draft Prudential Standard APS 220 Credit Risk Management can be found on the APRA website at: https://www.apra.gov.au/proposed-revisions-credit-risk-management-framework-authorised-deposit-taking-institutions.