The Australian Prudential Regulation Authority (APRA) has finalised its new capital framework for banks, building societies and credit unions and has published updated prudential standards for capital adequacy and credit risk capital.

Prudential Standard APS 110 Capital Adequacy (APS 110), Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112) and Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113) will commence on 1 January 2023.

APRA has also released for consultation draft guidance on the new framework, contained in Prudential Practice Guide APG 110 Capital Adequacy (draft APG 110), Prudential Practice Guide APG 112 Capital Adequacy: Standardised Approach to Credit Risk (draft APG 112) and Prudential Practice Guide APG 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (draft APG 113).

The framework is designed to align Australian standards for larger banks with the internationally agreed Basel III requirements and to help to ensure Australian banks continue to have the financial strength to withstand future adverse economic conditions, ensuring depositors are protected and lending is supported.

Within the new framework, APRA has introduced a set of simplified capital requirements that can be applied to small, less complex banks (those with under $20 billion in assets and simple business models).

For “standardised ADIs” APRA retains the minimum Prudential Capital Requirement for Common Equity Tier 1 Capital at 4.5% of Risk Weighted Assets and the capital conservation buffer at 2.5% but sets the default countercyclical capital buffer at 1.0%.

For the large banks APRA retains the minimum PCR at 4.5 per cent for Common Equity Tier 1 Capital and sets a baseline level for the countercyclical capital buffer of 1.0 per cent of RWA but increases the capital conservation buffer from 2.5 to 4.0 per cent.

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