ADIs’ capital requirements for large, concentrated exposures will increase under a revised capital adequacy standard that takes effect next year.

The Australian Prudential Regulation Authority has released the final revised prudential standard for the measurement of regulatory capital for capital adequacy, APS 111.

Publication of the final revised standard completes a process that started in October 2019. The revised standard will take effect in January next year.

Since the last significant update of APS 111 in 2013, the Basel Committee on Banking Supervision has released a number of standards and guidance relevant to the measurement of capital, relating to banks’ equity investment in funds, holdings of total loss absorbing capacity instruments and capital arbitrage transactions.

APRA had also flagged a review of the capital treatment of a parent ADI’s equity investments in banking and insurance subsidiaries.

The changes to the capital treatment of these exposures are the most significant amendments to APS 111. Under current arrangements ADIs can leverage their investments in banking and insurance subsidiaries, whether domestic or offshore, and do not require dollar-for-dollar capital at the parent company level.

APRA said this treatment raised the risk that capital held by the parent ADI would not be sufficient to support risks to its depositors.

APRA said moves by the Reserve Bank of New Zealand to materially increase capital requirements in New Zealand could exacerbate that risk.

The change in treatment will require an increase in the common equity tier 1 capital ratios of the major banks of around 100 basis points for their equity investments in New Zealand banking subsidiaries.

An exposure to an individual subsidiary representing more than 10 per cent of an ADI’s CET1 capital will be required to be met dollar-for-dollar by the ADI parent company.