Mackay Chapman October 2024 APRA Update

In this month’s APRA update:

• APRA proposes an update to the bank capital framework to strengthen crisis preparedness;
• Minor updates to prudential framework for ADIs, insurers, and RSE licensees;
• APRA remakes Prudential Standard APS 117 on Interest Rate Risk in the Banking Book; and
• A performance metrics package was launched to enhance superannuation transparency.

APRA Proposes Update to Bank Capital Framework to Strengthen Crisis Preparedness

The Australian Prudential Regulation Authority (APRA) has proposed updates to the capital framework for banks regarding hybrid instruments to enhance crisis preparedness. These changes aim to simplify resolution processes in the event of a bank failure and bolster deposit safety during stressful periods.

APRA plans to phase out AT1 capital instruments (hybrid bonds) and replace them with more reliable capital forms that absorb losses more efficiently. Overall regulatory capital requirements will remain unchanged, ensuring banks stay 'unquestionably strong.'

This proposal reflects lessons from last year’s global banking turmoil, where several banks required government intervention to prevent instability.

Under the plan, large banks could replace 1.5% of AT1 with 1.25% Tier 2 and 0.25% Common Equity Tier 1 (CET1) capital, while smaller banks would fully replace AT1 with Tier 2. The transition is set to begin on 1 January 2027, with all current AT1 instruments expected to be replaced by 2032.

A two-month discussion period is now open for stakeholder feedback. 

More details here. 

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APRA Consults on Minor Updates to Prudential Framework for ADIs, Insurers, and RSE Licensees

The Australian Prudential Regulation Authority (APRA) has opened a consultation on minor updates to the prudential framework for authorised deposit-taking institutions (ADIs), insurers, and registrable superannuation entity (RSE) licensees. This consultation aims to facilitate timely technical clarifications without significant policy changes.

Submissions are due by 4 October 2024. 

Further details, including a letter to stakeholders and draft standards, are available.

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APRA Remakes Prudential Standard APS 117 on Interest Rate Risk in the Banking Book

The Australian Prudential Regulation Authority (APRA) has responded to its July 2024 consultation regarding Prudential Standard APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (Advanced ADIs), which is set to sunset on 1 April 2025. With no submissions received, APRA has remade the standard to ensure its continuation until the new standard takes effect on 1 October 2025.

The remade standard remains unchanged, except for updating a reference to Prudential Standard APS 001 Definitions, which has been replaced by CPS 001 Defined Terms. 

The remade standard is available here: Interest Rate Risk in the Banking Book.

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APRA Launches Performance Metrics Package to Enhance Superannuation Transparency

The Australian Prudential Regulation Authority (APRA) has unveiled a comprehensive package of product performance metrics and insights to increase transparency and encourage superannuation trustees to enhance member outcomes.

Named the Comprehensive Product Performance Package (CPPP), this initiative consolidates performance metrics related to the legislated performance test and APRA's superannuation heatmaps. It encompasses 876 MySuper and choice products, covering the majority of investment options for accumulation members.

Notably, the number of products failing the performance test significantly decreased in 2024, dropping from 97 to just 37, with 52 underperforming products exiting the market. However, when considering broader investment performance, the CPPP also identifies additional products that have not met expectations.

The CPPP includes an insights paper, statistical publications, and interactive tools for product performance lookup, all available on the APRA website at Superannuation Product Performance.

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.