Capital risk weighting on government guaranteed deposits and debts

APRA has issued a circular advising that it"has assessed the terms of the Deed of Guarantee and Scheme Rules of 20 November 2008 under which ADIs may apply for certain liabilities to be guaranteed by the Commonwealth Government. The guarantee meets the criteria for an eligible guarantee under APS 112. Accordingly, ADIs holding debt instruments or deposits issued by another ADI, where the instrument is guaranteed by the Commonwealth of Australia under this program, may apply the risk-weight for claims on the Australian Government to those holdings. As per APS 112, claims on the Australian Government receive a zero risk-weight.  This also applies to deposits of up to $1 million guaranteed under the Financial Claims Scheme."

But APRA "expects that any reduction in regulatory capital requirements from the application of lower risk-weights will be reflected in higher capital ratios during the period of the guarantee, rather than any reduction in capital levels."

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