APRA responds to ADI submissions

The Australian Prudential Regulation Authority (APRA) outlined a new, minimum leverage ratio within the authorised deposit-taking institutions (ADIs) prudential framework earlier this year. 

The ratio, which measures the proportion of an ADI’s assets that is funded through equity rather than debt, is designed to supplement risk-based capital requirements by providing stakeholders with an alternative perspective. 

The submissions received by APRA mostly support the introduction of a minimum leverage ratio but raised concerns about the minimum requirement and calculation methodology.

In response to concerns raised, APRA has set the minimum requirement for ADIs using the internal ratings-based (IRB) approach to determine capital adequacy at 3.5 per cent, rather than 4 per cent. 

APRA has said it will keep the leverage ratio for standardised ADIs at 3 per cent and allow standardised ADIs to use Australian accounting standards rather than Basel III methodology. 

However, the Basel III methodology will be required by IRB ADIs to calculate their leverage ratios. 

Small ADIs that qualify for the simplified prudential framework will be exempt from the leverage ratio requirements, but under the new standards, will be required to report to APRA. 

Although consultation is still happening, APRA expects the eligibility threshold for that framework to be $15 billion in total assets, which will be complemented by other qualitative measures. 

The new standard to assess the leverage ratio is currently undergoing industry consultation with submissions due by February 2019.

The response reads: “APRA asks that all stakeholders use this consultation opportunity to provide information on the compliance impact of the proposals, and any other substantive costs associated with the changes. Compliance costs are defined as direct costs to businesses of performing activities associated with complying with government regulation. Specifically, information is sought on any changes to compliance costs incurred by businesses as a result of APRA’s proposals. Consistent with the government’s approach, APRA will use the methodology behind the Commonwealth Regulatory Burden Measure to assess compliance costs. 

“When submitting their costs assessment to APRA, respondents should include any assumptions AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY 15 made and, where relevant, any limitations inherent in their assessment. Feedback should address the additional costs incurred as a result of complying with APRA’s requirements, not activities that institutions would undertake due to foreign regulatory requirements or in their ordinary course of business.”

[Related: APRA extends Basel III deadline]