APRA proposes new capital risk weighting

APRA has released a discussion paper in which it proposes to strengthen the LMI prudential capital and reporting framework and the eligibility requirements for ADIs claiming the 50 per cent concessional risk weight on certain loans that are mortgage-insured.

Currently, under prudential standard APS 112 – Capital Adequacy: Credit Risk and associated guidance notes, ADIs qualify for a 50 per cent concessional risk weight on loans above 80 per cent LVR that are fully secured by registered mortgage over a residential property, and 100 per cent mortgage-insured through an ‘acceptable’ LMI. Without mortgage insurance, high-LVR loans attract a 100 per cent risk weight.

For non-standard loans, proposed amendments will require mortgage insurance on loans with an LVR in excess of 60 per cent for ADIs to claim the capital concession.

The proposal will amend the definition of ‘acceptable’ mortgage insurance to require insurance to be provided by an LMI that:
• is authorised by APRA; or
• is domiciled in a country APRA considers to have comparable prudential regulation.

Where the insurer or any reinsurer has contractual recourse to the ADI, or a member of the ADI’s consolidated group (excluding the captive LMI), the ADI will not be eligible for capital concessions.

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