APRA issues final responses to Basel II capital adequacy regime

The Australian Prudential Regulation Authority (APRA) has released a paper (pdf) that sets out its responses to submissions on its proposals to implement the standardised approaches under the new Basel II capital adequacy regime as well as two final draft prudential standards that incorporate a number of amendments suggested in the consultation process.

The final draft prudential standards cover:

• the standardised approach to credit risk [APS 112, first released in April 2005]; and
• the standardised approach to operational risk [APS 114, first released in July 2005].

The responses include:

• APRA will retain its proposed riskweighting scheme for residential mortgage loans (ie four different risk-weights based on the loan-to-valuation ratio (LVR) of a loan, whether the loan has acceptable lenders mortgage insurance and whether the loan is a ‘standard’ or ‘non-standard’ housing loan.
• In the final draft APS 112, the risk-weighting treatment of past due or impaired residential mortgage loans differs depending on whether or not the loans are covered by acceptable lenders mortgage insurance.

The proposals form part of the Basel II capital adequacy regime for ADIs that will come into force on 1 January 2008. The full suite of Basel II prudential standards is expected to be finalised in late 2007.

Comments on the response paper and the final draft prudential standards APS 112 Capital Adequacy:Standardised Approach to Credit Risk and APS 114 Capital Adequacy: Standardised Approach to Operational Risk are invited by 3 September 2007