The Australian Prudential Regulation Authority (APRA) has begun consulting on new prudential standards to strengthen the preparedness of banks, insurers and superannuation trustees to respond to future financial crises.
The two proposed standards are aimed at ensuring entities are prepared to deal with threats to their viability, thereby reducing the negative consequences resulting from failure.
- CPS 190 Financial Contingency Planning (CPS 190) would ensure all APRA-regulated entities have plans for responding to severe financial stress. These plans would set out actions that an entity would take in stress to restore financial resilience or exit the industry safely, while protecting depositors, insurance policyholders and superannuation fund members. Smaller entities will be subject to less onerous requirements, in line with their size, complexity and business models.
- CPS 900 Resolution Planning (CPS 900) would require large or complex APRA-regulated entities to take pre-emptive actions so that, in the event of their failure, APRA can resolve them with limited adverse impacts on the community and the financial system. This includes ensuring that critical financial services can continue to be provided with minimal disruption.
APRA is also finalising requirements for the four major banks to maintain additional loss-absorbing capacity (LAC). The purpose of the adjustment is to ensure that, in the unlikely event of a failure, a major bank could be recapitalised using a large pool of private, rather than taxpayer, funds.
APRA today wrote to the major banks confirming that the final setting for loss-absorbing capacity will be an increase in minimum Total Capital requirements of 4.5 percentage points of risk-weighted assets, to be met from 1 January 2026. The major banks have already made significant progress towards meeting this requirement, having met interim targets put in place following the consultation in 2018.
Deputy Chair John Lonsdale said the disorderly failure of an APRA-regulated entity could have a significant impact on the economy and society.
“Crisis preparedness and resolution planning gets to the very heart of APRA’s purpose to protect the financial interests of bank depositors, insurance policyholders and superannuation members.
“Although Australia has one of the strongest and most stable financial systems in the world, and failures are extremely rare, businesses in any competitive market can face financial difficulties. Should that happen, we want to be sure each entity has the capability to either recover, or manage an orderly exit with the smallest possible impact on the community and the financial system.
“APRA-regulated entities have made substantial improvements in contingency planning over recent years, however there remain large gaps in capabilities between entities and across industries. By laying out a consistent, transparent and enforceable framework, APRA will be better able to strengthen crisis preparedness and close those gaps,” Mr Lonsdale said.
A five-month consultation on CPS 190 and CPS 900 is now underway. The consultation closes on 29 April 2022. APRA proposes that the new prudential standards would come into force from 1 January 2024, and one year later for superannuation trustees for CPS 190 only. APRA will also consult on supporting guidance material in 2022.
A discussion paper on strengthening crisis preparedness, and the two draft prudential standards, are available at: Strengthening crisis preparedness.
A letter to the major banks announcing the finalisation of the LAC requirements is available here: Finalising loss-absorbing capacity requirements for domestic systemically important banks.