{"id":"F2025L00652","name":"Banking (prudential standard) determination No. 2 of 2025","slug":"banking-prudential-standard-determination-no-2-of-2025","collection":"legislative_instrument","jurisdiction":"commonwealth","status":"in_force","isInForce":true,"actNumber":null,"makingDate":null,"administeringDepartment":null,"currentVersion":{"id":106436,"registerId":"commonwealth-F2025L00652-current","compilationNumber":null,"startDate":"2026-04-03","status":"InForce","reasons":null,"registeredAt":null},"sections":[{"sectionNumber":"Interpretation","sectionType":"section","heading":"Interpretation","content":"![Commonwealth Coat of Arms](image.001.png)\n\nBanking (prudential standard) determination No. 2 of 2025\n\nPrudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk\n\nBanking Act 1959\n\nI, Sean Carmody, a delegate of APRA:\n\n under subsection 11AF(3) of the Banking Act 1959 (the Act), REVOKE Banking (prudential standard) determination No. 1 of 2024, including Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk made under that determination; and\n\n under subsection 11AF(1) of the Act, DETERMINE Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk in the form set out in the schedule, which applies to all ADIs and authorised NOHCs to the extent provided in paragraphs 2 to 4 of the prudential standard.\n\nThis instrument commences on 1 July 2025.\n\nDated: 13 April 2025\n\nSean Carmody\n\nExecutive Director\n\nPolicy and Advice Division\n\n###### Interpretation\n\n###### In this instrument:\n\nAPRA means the Australian Prudential Regulation Authority.\n\nADI, authorised NOHC and prudential standard have their respective meanings given in subsection 5(1) of the Act.\n\n \n\nSchedule\n\nPrudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk comprises the document commencing on the following page.","sortOrder":0},{"sectionNumber":"In this instrument:","sectionType":"section","heading":"In this instrument:","content":"###### In this instrument:\n\nAPRA means the Australian Prudential Regulation Authority.\n\nADI, authorised NOHC and prudential standard have their respective meanings given in subsection 5(1) of the Act.\n\n \n\nSchedule\n\nPrudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk comprises the document commencing on the following page.","sortOrder":1},{"sectionNumber":"Risk-weighted on-balance sheet assets","sectionType":"division","heading":"Risk-weighted on-balance sheet assets","content":"### Risk-weighted on-balance sheet assets\n\n1. An ADI must calculate the RWA of an on-balance sheet exposure by multiplying the current book value of the exposure (including accrued interest or revaluations, and net of any provisions for defaulted exposures, partial write-off or associated depreciation) by the relevant risk weight. Where an ADI has liquid assets[\\[4\\]](#_ftn4) accounted for at amortised cost, the ADI may adjust its exposures for deductions from Common Equity Tier 1 Capital to reflect unrealised fair value losses at a portfolio level as allowed under paragraph 41 of Attachment D to APS 111.","sortOrder":2},{"sectionNumber":"Risk-weighted off-balance sheet exposure","sectionType":"division","heading":"Risk-weighted off-balance sheet exposures","content":"### Risk-weighted off-balance sheet exposures\n\n1. The RWA of a non-SFT off-balance sheet exposure must be calculated by applying the following two-step process:\n 1. first, the exposure amount or exposure at default (EAD), representing the on-balance sheet equivalent amount, must be determined according to:\n 1. Attachment C to this Prudential Standard for any commitments; and\n 2. where the ADI is a significant financial institution, APS 180 for OTC and exchange-traded derivative transactions or long-settlement transactions. Where an ADI uses the adjusted current exposure method (CEM) under APS 180 and the transaction is collateralised, the ADI may also adjust the credit equivalent amount (CEA) by applying the comprehensive approach in Attachment G to this Prudential Standard;\n 2. second, the resulting exposure amount or EAD must be multiplied by the relevant risk weight applicable to the counterparty or exposure type.\n\n1. For SFTs, including securities lending transactions, an ADI must calculate:\n 1. RWA arising from its exposure to the SFT counterparty, where EAD is calculated in accordance with Attachment G to this Prudential Standard and is multiplied by the relevant risk weight applicable to the SFT counterparty; and\n 2. the capital requirement for the credit risk or market risk inherent in any securities the ADI lends or posts as collateral, if that risk remains with the ADI.\n\nCredit risk mitigation\n\n1. Where multiple CRM techniques cover a single exposure, an ADI must divide the exposure into portions covered by each CRM technique. The RWA of each portion must be calculated separately, and then totalled. If credit protection provided by a single protection provider has differing maturities, they must also be subdivided into separate protected portions.\n2. An ADI must not recognise additional CRM on exposures where the risk weight is mapped from an ECAI issue-specific credit rating, and that credit rating already incorporates the recognition of CRM.\n3. An ADI must not recognise the use of CRM where the credit quality of the counterparty has a material positive correlation with the CRM technique used, or with any resulting residual risks (e.g. collateral in the form of securities issued by the counterparty to the credit exposure is considered to have a material positive correlation with the credit quality of the original counterparty).\n4. To obtain capital relief through the use of a CRM technique, all documentation must be binding on all parties and legally enforceable in all relevant jurisdictions. The ADI must have undertaken sufficient legal review to be satisfied of the legal enforceability of the CRM technique, and must undertake periodic reviews to confirm its ongoing enforceability.","sortOrder":3},{"sectionNumber":"Attachment A — Risk weights for property","sectionType":"part","heading":"Attachment A — Risk weights for property exposures","content":"## Attachment A – Risk weights for property exposures\n\n1. A property exposure is an exposure that is secured by immovable real property. An ADI must risk weight its property exposures according to the requirements detailed in this Attachment, with the exception of defaulted property exposures, which must be risk-weighted in accordance with Attachment E to this Prudential Standard.","sortOrder":4},{"sectionNumber":"Standard property loans","sectionType":"part","heading":"Standard property loans","content":"# Standard property loans\n\n1. A loan must meet all of the requirements set out in paragraphs 3 to 7 of this Attachment to be classified as standard.\n2. An ADI must have unequivocal enforcement rights over the mortgaged property at all times, including a right to possession and power of sale in the event of default by the borrower. An ADI must reasonably consider that it would be able to realise the value of the property provided as security within a reasonable timeframe.\n3. An ADI’s exposure must be secured by a registered first mortgage over the property, or by a registered second mortgage which satisfies the following conditions:\n 1. the ADI must obtain the written consent of the first mortgagee for the second mortgage, and confirm the maximum outstanding amount of the loan secured by the first mortgage (including the maximum drawdown or limit of the facility) for LVR purposes;\n 2. the ADI must ensure that the amount secured by the first mortgage cannot be increased without being subordinate to the second mortgage;\n 3. the ADI, as second mortgagee, must be able to exercise its power of sale over the property independently of any other mortgagee over the property; and\n 4. where the sale of the property is not carried out by means of a public auction, the first mortgagee must be required to take reasonable steps to obtain a fair market value, or the best price that may be obtained in the circumstances, when exercising any power of sale (i.e. it is not possible for the first mortgagee to sell the property on its own at a discounted value to the detriment of the ADI).\n\n1. An ADI must, prior to loan approval, appropriately document, assess and verify the ability of the borrower to meet their repayment obligations. This must, at a minimum, include:\n \n 1. consideration of the impact of higher interest rates on the ability of the borrower to repay;\n 2. the application of the assessment in paragraph 5(a) of this Attachment to the loan being assessed for approval and all existing and ongoing debt commitments of the borrower(s), both secured and unsecured;\n 3. for interest-only loans secured by residential property, an assessment of serviceability for the specific term over which principal-and-interest repayments apply, excluding the interest-only period; and\n \n 1. where the repayment of a commercial property loan is dependent on the cash flows generated by the property through rental income, an assessment of the tenancy profile relative to the maturity of the loan.\n\nWhere an ADI’s assessment does not result in a positive determination of the borrower’s ability to meet their repayment obligations, an ADI must classify the loan as non-standard.\n\n1. An ADI must appropriately value any property offered as security in accordance with paragraph 11 of this Attachment. With the exception of land acquisition, development and construction (ADC) exposures, the value of the property must not depend materially on the performance of the borrower.\n2. All of the information required at loan origination and for monitoring purposes must be accurately documented and readily accessible to the ADI, including information on the ability of the borrower to repay and on the valuation of the property.\n3. Property exposures that were originated prior to 1 January 2023, with no material change to loan terms and conditions subsequent to this date, do not need to satisfy the criteria set out in paragraph 5 of this Attachment to be classified as standard loans.","sortOrder":5},{"sectionNumber":"Loan-to-valuation ratio","sectionType":"part","heading":"Loan-to-valuation ratio","content":"# Loan-to-valuation ratio\n\n1. The components of LVR must be prudently calculated in accordance with the requirements set out in paragraphs 10 and 11 of this Attachment.\n2. The amount of the loan includes the outstanding loan amount (including accrued interest and fees) and any undrawn committed amount (as set out in Attachment C to this Prudential Standard), calculated gross of any provisions for defaulted exposures and other credit risk mitigants. If an ADI provides:\n 1. multiple loans secured by the same property and they are sequential in ranking order (i.e. there is no intermediate interest from another lender), the loan amounts must be aggregated and treated as a single exposure for the purpose of calculating the LVR; or\n 2. a loan that is secured by a second mortgage, the outstanding amount of the loan must be calculated as the sum of all claims on the borrower secured by both the first and second mortgages over the same property for the purpose of calculating the LVR.\n\nWhen calculating LVR, the loan amount will reduce if the loan amortises.\n\n1. The value of the property must be appraised independently using prudently conservative criteria, consistent with the requirements set out in APS 220.[\\[5\\]](#_ftn5) If a market value can be determined, the valuation must not be higher than the market value.[\\[6\\]](#_ftn6) For the purpose of calculating the property value:\n 1. the value of the property at origination must be maintained, unless:\n 1. an updated valuation is obtained as part of a new loan application process in relation to the mortgaged property;\n 2. an event occurs that results in a likely permanent reduction in the property’s value; or\n 3. modifications are made to the property or contractual tenancy arrangements, that unequivocally increase its value, and an updated valuation is obtained which confirms the increase in value;\n 2. where a loan is secured by multiple properties, an ADI must use the aggregate value of the mortgaged properties for the purpose of calculating LVR; however, where a residential property exposure is secured by both residential and commercial properties, an ADI must apply a 40 per cent haircut to the value of any commercial property included in calculating LVR; and\n 3. for a reverse mortgage, where a borrower has been guaranteed a minimum share in the future sale proceeds of a mortgaged property, the calculation of the LVR for regulatory purposes must be adjusted by reducing the value of the mortgaged property by the quarantined percentage share.\n2. For exposures secured by commercial property that were originated prior to 1 January 2023, an ADI may use the current valuation, rather than the value of the property at origination, for the purpose of paragraph 11(a) of this Attachment.","sortOrder":6},{"sectionNumber":"Credit risk mitigation","sectionType":"part","heading":"Credit risk mitigation","content":"# Credit risk mitigation\n\n1. An ADI may use eligible CRM techniques to reduce the exposure amount of a property exposure, but the LVR band and applicable risk weight must be determined before the application of the relevant CRM technique.","sortOrder":7},{"sectionNumber":"Residential property","sectionType":"part","heading":"Residential property","content":"# Residential property\n\n1. A residential property exposure is an exposure where the predominant security is an immovable property that has the nature of a dwelling, and satisfies all applicable laws and regulations enabling the property to be occupied for housing purposes. Residential property includes the following exposure types:\n 1. ‘Owner-occupied’ refers to a loan for the purpose of housing, where the funds are used for a residential property that is occupied, or to be occupied, by the borrower(s) as their principal place of residence. Where the loan is for a residential property that is different to the residential property against which the loan is secured, this definition refers to the occupation status of the residential property for which the loan has been obtained (not the occupation status of the residential property used as security). It includes:\n 1. a dwelling or residential land that is vacant while under construction, but that the borrower intends to occupy as a principal place of residence; and\n 2. a part-time residence that is the principal place of residence of the borrower(s).\n\nWhere finance is to be used for more than one purpose (e.g. owner-occupied, investment or non-housing purposes), the entire amount of the finance must be classified according to the predominant purpose (i.e. the purpose for which the largest share of the funds will be used). Where there is any doubt or ambiguity about whether a loan is for an owner-occupied or investment purpose, the loan must be treated as an ‘other standard residential property’ exposure.\n\n1. ‘Principal-and-interest’ refers to a loan on which interest is paid and principal is automatically amortised over the life of the loan.\n2. ‘Other standard residential property’ refers to any of the following exposures:\n 1. loans for a purpose other than owner-occupation, including for investment or business purposes;\n 2. interest-only loans with an interest-only term of five years or less, where only interest is paid and principal is not automatically amortised; or\n 3. other loans that do not meet both of the criteria in paragraphs 14(a) and 14(b) of this Attachment.","sortOrder":8},{"sectionNumber":"Lenders’ mortgage insurance","sectionType":"division","heading":"Lenders’ mortgage insurance","content":"### Lenders’ mortgage insurance\n\n1. An ADI may reduce its capital requirement through the application of LMI, where the insurance:\n 1. provides cover for all losses up to at least 40 per cent of the higher of the original loan amount and outstanding loan amount; and\n 2. is provided by an eligible lenders’ mortgage insurer, which means that:\n 1. for the purposes of Level 1 Regulatory Capital, the lenders’ mortgage insurer must be regulated by APRA; and\n 2. for the purposes of Level 2 Regulatory Capital, in the case of overseas subsidiaries of Australian ADIs, the lenders’ mortgage insurer is regulated by an overseas prudential regulator.","sortOrder":9},{"sectionNumber":"Risk weights for standard residential pr","sectionType":"division","heading":"Risk weights for standard residential property loans","content":"### Risk weights for standard residential property loans\n\n1. An ADI must apply the risk weights in Table 1 to its residential property exposures that satisfy all of the conditions of a standard loan as set out in paragraphs 3 to 7 of this Attachment, based on their classification as an owner-occupied principal-and-interest or other standard residential property exposure, the application of eligible LMI and the exposure’s LVR.\n\n1. Risk weights for standard loans\n\n```html\n

LVR (%)

Risk weight (%)

≤ 50

50.01 - 60

60.01 - 70

70.01 - 80

80.01 - 90

90.01 - 100

> 100

Owner-occupied principal-and-interest

LMI

20

25

30

35

40

55

70

No LMI

50

70

85

Other standard residential property

LMI

25

30

40

45

50

70

85

No LMI

65

85

105

\n```\n\n1. An ADI may apply a risk weight of 35 per cent to residential property exposures that satisfy the conditions for inclusion within the Australian Government’s Home Guarantee Scheme, and in respect of which the National Housing Finance and Investment Corporation has issued a guarantee certificate to the ADI. This capital treatment ceases to apply when:\n 1. the guarantee certificate expires or is released in accordance with the terms of the Deed of Guarantee in respect of the First Home Loan Deposit Scheme or the Family Home Guarantee Scheme; or\n 2. APRA determines that it no longer applies.\n\nAPRA may determine that this treatment may also be applied to a similar guarantee scheme that is offered by the Australian Government or an Australian State or Territory government.","sortOrder":10},{"sectionNumber":"Risk weights for non-standard residentia","sectionType":"division","heading":"Risk weights for non-standard residential property loans","content":"### Risk weights for non-standard residential property loans\n\n1. An exposure that is secured by residential property but does not meet any of the requirements set out in paragraphs 3 to 7 of this Attachment, must be classified as a non-standard loan.\n2. The following exposures must also be classified as non-standard loans:\n 1. interest only loans with an LVR greater than 80 per cent and an interest-only term that is specified in the loan contract as greater than five years or is of unspecified duration. The non-standard treatment applies while the loan remains on interest-only repayment terms. Exposures that meet the above criteria but are predominantly for business purposes may be excluded;\n 2. reverse mortgages, which are exposures that do not require principal-and-interest payments until termination of the facility. A risk weight of 50 per cent may only be applied to reverse mortgages where the criteria in paragraphs 3, 4, 6 and 7 of this Attachment are satisfied in addition to the LVR criteria in Table 2;\n 3. shared equity mortgages, where both the borrower and lender share in any gain or loss in the value of the mortgaged property; and\n 4. loans to self-managed superannuation funds.\n3. An ADI must apply the risk weights in Table 2 to its non-standard loans secured by residential property, based on LVR (where applicable).\n\n1. Risk weights for non-standard loans\n\n```html\n

LVR (%)

Risk weight (%)

≤ 60

> 60

Reverse mortgages

50

100

All other non-standard loans

100

\n```\n\n1. A loan secured by residential property which does not meet the criteria set out in paragraph 5 of this Attachment, and consequently must be classified as a non-standard loan, may be reclassified as a standard loan where the loan has been performing consecutively for the previous 36 months.","sortOrder":11},{"sectionNumber":"Commercial property","sectionType":"part","heading":"Commercial property","content":"# Commercial property\n\n1. A commercial property exposure is a property exposure that is not a residential property exposure as defined in paragraph 14 of this Attachment, and is not land acquisition, development and construction as defined in paragraphs 27 and 28 of this Attachment.","sortOrder":12},{"sectionNumber":"Dependent on property cash flows","sectionType":"division","heading":"Dependent on property cash flows","content":"### Dependent on property cash flows\n\n1. If the prospects for repayment of the exposure depend primarily on the cash flows generated by the asset or other real estate assets owned by the borrower, an ADI must apply the risk weights in Table 3 based on LVR and the classification of the loan as standard or non-standard.\n\n1. Risk weights for commercial property exposures – dependent on property cash flows\n\n```html\n

LVR (%)

Risk weight (%)

≤ 60

60.01 - 80

> 80

Standard

70

90

110

Non-standard

150

\n```","sortOrder":13},{"sectionNumber":"Not dependent on property cash flows","sectionType":"division","heading":"Not dependent on property cash flows","content":"### Not dependent on property cash flows\n\n1. If the servicing and repayment of a commercial property exposure does not meet the criteria for dependence as set out in paragraph 23 of this Attachment, an ADI must apply the risk weights in Table 4 based on counterparty type, LVR and the classification of the loan as standard or non-standard.\n\n1. Risk weights for commercial property exposures – not dependent on property cash flows\n\n```html\n

Counterparty

Risk weight (%)

LVR ≤ 60

LVR > 60 or non-standard

Rated corporate

60, or

the risk weights in Table 10

Risk weights in Table 10

All other counterparties

60

According to applicable risk weight in Attachment B

\n```\n\n1. An exposure may be classified as ‘commercial property exposures - not dependent on property cash flows’ where an ADI has recourse to a borrower that meets all of the following criteria:\n 1. the borrower is a corporate entity that is managed by a recognised, professional and reputable management team;\n 2. the ADI’s exposure to the borrower is not specifically or substantially financing limited recourse development projects;\n 3. the borrower has greater than $250 million in tangible assets, to which the ADI has unconditional recourse;\n 4. real estate assets are sufficiently diversified such that:\n 1. no single asset represents greater than 25 per cent of the borrower’s real estate portfolio by value; and\n 2. real estate assets are not concentrated in one particular specific geographic location; and\n 5. for real estate operators or investors, tenants are sufficiently diversified such that no single tenant represents:\n 1. greater than 25 per cent of portfolio net rental income for portfolios of retail shopping centres that typically require significant anchor tenants to attract specialty tenants; and\n 2. greater than 10 per cent of portfolio net rental income for all other portfolios of real estate assets (e.g. commercial offices, industrial buildings, hotels), with the exception of Government tenants.\n2. Where an ADI has an exposure to commercial property that is used predominantly for forest or agricultural purposes, it may classify the exposure as ‘not dependent’, unless the property has been acquired specifically for lease or resale, and the servicing of the debt is dependent on such lease or resale (or the lease or resale of other properties).","sortOrder":14},{"sectionNumber":"Land acquisition, development and constr","sectionType":"part","heading":"Land acquisition, development and construction","content":"# Land acquisition, development and construction\n\n1. Land acquisition, development and construction (ADC) refers to property exposures where the security for the loan predominantly relates to any of the land acquisition for development and construction purposes, or development and construction of any residential or commercial property.\n2. All property exposures where the predominant property security is not fully completed must be included as ADC unless:\n 1. the property is used predominantly for forest or agricultural purposes; or\n 2. the loan is secured by residential property under construction, or by land upon which residential property will be constructed, where the property will be the primary residence of the borrower.\n3. An ADI may apply a risk weight of 100 per cent to its ADC exposures secured by residential property if the following conditions are met:\n 1. the exposure meets all of the requirements in paragraphs 3, 4, 6 and 7 of this Attachment;\n 2. total debt to qualifying development costs are less than 75 per cent, where debt includes all debt facilities held by the borrower in relation to the underlying property;\n 3. where the exposure to the borrower is greater than $5 million in aggregate for a single development, qualifying pre-sales for the underlying property are at least equal to 100 per cent of the total debt; and\n 4. the ADI has a policy that defines qualifying pre-sales and qualifying development costs for the purpose of meeting the requirements under paragraph 29 of this Attachment.\n4. An ADI must apply a risk weight of 150 per cent to all other ADC exposures.","sortOrder":15},{"sectionNumber":"Attachment B — Risk weights for non-prop","sectionType":"part","heading":"Attachment B — Risk weights for non-property exposures","content":"## Attachment B – Risk weights for non-property exposures\n\n1. An ADI must risk-weight all exposures that are not property exposures according to the requirements detailed in this Attachment, with the exception of:\n 1. unsettled and failed transactions, which must be risk-weighted in accordance with Attachment D to this Prudential Standard; and\n 2. defaulted exposures, which must be risk-weighted in accordance with Attachment E to this Prudential Standard.\n2. Where this Attachment requires an ADI to assign risk weights based on external credit ratings, an ADI must also comply with the requirements set out in Attachment F to this Prudential Standard.","sortOrder":16},{"sectionNumber":"Sovereign exposures","sectionType":"part","heading":"Sovereign exposures","content":"# Sovereign exposures\n\n1. A sovereign exposure includes:\n 1. all exposures to Australian and overseas central and subnational governments, where a subnational government is defined as a government of a geographically defined part of a state which has powers to raise revenue and borrow money;\n 2. all exposures to the Reserve Bank of Australia and overseas central banks, where a central bank is defined as an entity which is responsible for overseeing and implementing the monetary policy of a state or group of states; and\n 3. all exposures to institutions and multilateral development banks eligible for a zero per cent risk weight.[\\[7\\]](#_ftn7)\n\n1. An ADI must apply the risk weights in Table 5 to its sovereign exposures, based on the external credit rating of the sovereign, with the exception of those sovereign exposures eligible for a zero per cent risk weight under paragraph 3(c) of this Attachment.\n\n1. Risk weights for sovereign exposures\n\n| Credit rating grade | 1 | 2 | 3 | 4, 5 | 6 | Unrated |\n| ------------------- | --- | --- | --- | ---- | --- | ------- |\n| Risk weight (%) | 0 | 20 | 50 | 100 | 150 | 100 |\n\n1. Exposures to the Australian Government and Reserve Bank of Australia that are denominated and funded in Australian dollars may be risk-weighted at zero per cent.","sortOrder":17},{"sectionNumber":"Domestic public sector entities","sectionType":"part","heading":"Domestic public sector entities","content":"# Domestic public sector entities\n\n1. An ADI must apply the risk weights in Table 6 to its exposures to domestic public sector entities (PSEs) that do not meet the definition of a sovereign exposure, based on the external credit rating of the domestic PSE.\n\n1. Risk weights for domestic PSEs\n\n| Credit rating grade | 1 | 2 | 3 | 4, 5 | 6 | Unrated |\n| ------------------- | --- | --- | --- | ---- | --- | ------- |\n| Risk weight (%) | 20 | 50 | 50 | 100 | 150 | 50 |","sortOrder":18},{"sectionNumber":"Bank exposures","sectionType":"part","heading":"Bank exposures","content":"# Bank exposures\n\n1. An exposure to a bank counterparty includes all exposures, other than equity or subordinated debt, to an ADI or overseas bank. It includes any exposures to multilateral development banks that are not eligible to be risk-weighted at zero per cent in accordance with paragraph 3(c) of this Attachment.\n2. An ADI must apply the risk weights in Table 7 to its bank exposures, based on the external credit rating of the bank.\n\n1. Risk weights for bank exposures\n\n| Credit rating grade (long-term) | 1 | 2 | 3 | 4, 5 | 6 | Unrated |\n| ------------------------------------ | --- | --- | --- | ---- | --- | ------- |\n| Risk weight (%)(short-term exposure) | 20 | 20 | 20 | 50 | 150 | 20 |\n| Risk weight (%)(long-term exposure) | 20 | 30 | 50 | 100 | 150 | 50 |\n\n1. For the purpose of Table 7, an ADI may apply the short-term exposure risk weights to its bank exposures, where the exposure:\n 1. has an original maturity of three months or less; or\n 2. arises from the movement of goods across national borders, with an original maturity of six months or less.[\\[8\\]](#_ftn8)\n2. Unrated bank exposures must be risk-weighted as the higher of:\n 1. 20 per cent for short-term exposures and 50 per cent for long-term exposures; and\n 2. the risk weight applicable to exposures to the sovereign of the country where the bank counterparty is incorporated.\n\nThe sovereign risk-weight floor does not apply to short-term self-liquidating, trade-related contingent items that arise from the movement of goods.[\\[9\\]](#_ftn9)\n\n1. An ADI must apply the risk weights in Table 8 to short-term bank exposures with an issue-specific external credit rating.\n\n1. Risk weights for bank exposures (short-term issue-specific credit ratings)\n\n| Credit rating grade (short term) | 1 | 2 | 3 | 4 |\n| -------------------------------- | --- | --- | --- | --- |\n| Risk weight (%) | 20 | 50 | 100 | 150 |\n\n1. If an ADI has a bank exposure with an issue-specific short-term external credit rating that maps to a credit rating grade:\n 1. that requires a higher risk weight than would be assigned under Table 7 (short-term exposure), then an ADI must risk-weight the exposure in accordance with Table 8 and not Table 7;\n 2. of 2 or 3 under Table 8, then all unrated short-term exposures to that counterparty must be risk-weighted at 100 per cent; and\n 3. of 4 under Table 8, then all unrated exposures to that counterparty, whether they are short-term or long-term exposures, must be risk-weighted at 150 per cent.\n2. When assigning risk-weights to bank exposures based on external credit ratings, an ADI must not use ratings that incorporate assumptions of implicit government support.","sortOrder":19},{"sectionNumber":"Covered bonds","sectionType":"division","heading":"Covered bonds","content":"### Covered bonds\n\n1. An ADI may apply the risk weights in Table 9 to its covered bond exposures with an issue-specific external credit rating, where the requirements set out in paragraphs 15 and 16 of this Attachment are met.\n\n1. Risk weights for rated covered bond exposures\n\n| Credit rating grade | 1 | 2, 3 | 4, 5 | 6 |\n| ------------------- | --- | ---- | ---- | --- |\n| Risk weight (%) | 10 | 20 | 50 | 100 |\n\n1. An ADI may apply the risk weights in Table 9 where:\n 1. the cover pool includes only the following assets:\n 1. loans to, or guaranteed by, sovereigns or domestic PSEs;\n 2. loans to, or guaranteed by, banks that qualify for a risk weight of 30 per cent or lower in accordance with paragraphs 8 to 10 of this Attachment; however, such assets cannot exceed 15 per cent of the cover pool;\n 3. residential property exposures that meet the requirements in paragraphs 3 to 7 of Attachment A to this Prudential Standard for covered bonds issued in Australia, and as defined by the relevant supervisory authority for covered bonds issued in other jurisdictions, with an LVR equal to or less than 80 per cent; and\n 4. commercial property exposures that meet the requirements in paragraphs 3 to 7 of Attachment A to this Prudential Standard for covered bonds issued in Australia, and as defined by the relevant supervisory authority for covered bonds issued in other jurisdictions, with an LVR equal to or less than 60 per cent;\n 2. the nominal value of the cover pool exceeds the nominal outstanding value of the covered bond by at least 10 per cent; and\n 3. the conditions set out in this paragraph are satisfied at the time of issuance, and at all times throughout the remaining maturity of the covered bond.\n2. An ADI must be able to demonstrate to APRA that, at a minimum, the following information is available to the ADI on at least a semi-annual basis:\n 1. the value of the cover pool and outstanding covered bonds;\n 2. the geographical distribution and type of cover assets, loan size, interest rate and currency risks;\n 3. the maturity structure of assets in the cover pool and of the covered bonds; and\n 4. the percentage of loans that are 90 days or more past-due.\n3. Where a covered bond is unrated or does not meet the requirements set out in paragraphs 15 and 16 of this Attachment, an ADI must treat the covered bond as a bank exposure and apply the risk weights in Table 7.","sortOrder":20},{"sectionNumber":"Corporate exposures","sectionType":"part","heading":"Corporate exposures","content":"# Corporate exposures\n\n1. An exposure to a corporate counterparty includes all exposures to incorporated entities, associations, partnerships, proprietorships, trusts, funds and other entities that do not meet the definition of any other asset class. Exposures to financial institutions, excluding banks but including insurance companies or securities companies, must be treated as corporate exposures. Exposures to equity or subordinated debt, or exposures through a third party as detailed in paragraph 41 of this Attachment, must not be included as corporate exposures.","sortOrder":21},{"sectionNumber":"General corporate — rated exposures","sectionType":"division","heading":"General corporate — rated exposures","content":"### General corporate – rated exposures\n\n1. An ADI must apply the risk weights in Table 10 to its general corporate exposures with an external credit rating.\n\n1. Risk weights for general corporate exposures\n\n| Credit rating grade (long-term) | 1 | 2 | 3 | 4 | 5, 6 |\n| ------------------------------- | --- | --- | --- | --- | ---- |\n| Risk weight (%) | 20 | 50 | 75 | 100 | 150 |\n\n1. An ADI must apply the risk weights in Table 11 to short-term general corporate exposures with an issue-specific external credit rating.\n\n1. Risk weights for general corporate exposures (short-term issue-specific credit ratings)\n\n| Credit rating grade (short-term) | 1 | 2 | 3 | 4 |\n| -------------------------------- | --- | --- | --- | --- |\n| Risk weight (%) | 20 | 50 | 100 | 150 |\n\n1. If an ADI has a general corporate exposure with an issue-specific short-term external credit rating mapping to a credit rating grade of 4 under Table 11, then all unrated exposures to that counterparty, whether they are short-term or long-term exposures, must be risk-weighted at 150 per cent.","sortOrder":22},{"sectionNumber":"General corporate — unrated small- and m","sectionType":"division","heading":"General corporate — unrated small- and medium-sized enterprise exposures","content":"### General corporate – unrated small- and medium-sized enterprise exposures\n\n1. An exposure to an SME is an exposure to a corporate counterparty with total consolidated annual revenue of less than $75 million. Where an ADI has an exposure to an SME that is part of a corporate group, it may be treated as an SME exposure provided the total consolidated annual revenue for the group is less than $75 million. Where a corporate counterparty’s total consolidated annual revenue cannot be determined, and the exposure is less than $5 million, the ADI may treat the exposure as SME.\n2. An ADI must apply the risk weights in Table 12 to its unrated SME exposures.\n\n1. Risk weights for unrated SME exposures\n\n| | Risk weight (%) |\n| ------------- | --------------- |\n| SME retail | 75 |\n| SME corporate | 85 |\n\n1. To be risk-weighted as SME retail, the following criteria must be satisfied:\n 1. the exposure is in the form of a small business lending facility or commitment. Derivatives and other securities such as bonds and equities, and exposures secured by residential property are excluded from this category; and\n 2. the maximum aggregated exposure to the SME counterparty is less than $1.5 million. For this purpose:\n 1. aggregated exposure means the gross amount, excluding the application of any credit risk mitigation. For off-balance sheet exposures, the gross amount must be calculated after applying CCFs; and\n 2. the SME counterparty means either a single SME, or where the SME forms part of a corporate group, the broader group.","sortOrder":23},{"sectionNumber":"General corporate — other","sectionType":"division","heading":"General corporate — other","content":"### General corporate – other\n\n1. For all other unrated general corporate exposures that are not treated as SME, an ADI must either:\n 1. assign a 100 per cent risk-weight to all exposures; or\n 2. assign an 85 per cent risk-weight to exposures to ‘investment grade’ corporates and a 110 per cent risk weight to exposures to ‘non-investment grade’ corporates where the ADI has in place an APRA approved methodology that differentiates between ‘investment grade’ and ‘non-investment grade’ corporates.\n\nAn investment grade general corporate refers to a general corporate entity that has adequate capacity to meet its financial commitments in a timely manner and its ability to do so is assessed to be robust against adverse changes in the economic cycle and business conditions. When assessing whether a general corporate exposure is investment grade or non-investment grade, an ADI must assess the general corporate entity against the investment grade definition taking into account the complexity of its business model, performance against industry and peers, and risks posed by the entity’s operating environment. An ADI must have sufficient information to conduct adequate due diligence for the assessment of whether the corporate entity is investment grade.","sortOrder":24},{"sectionNumber":"Specialised lending","sectionType":"division","heading":"Specialised lending","content":"### Specialised lending\n\n1. A corporate exposure must be classified as a specialised lending exposure if it possesses the following characteristics, either in legal form or economic substance:\n 1. the exposure satisfies the definition of object finance, project finance or commodities finance as set out in paragraph 27 of this Attachment, is not a property exposure and is not secured by derivatives or other securities such as bonds or equities;\n 2. the exposure is typically to an entity that was created specifically to finance or operate physical assets;\n 3. other than the income that it receives from the assets being financed, the borrowing entity has little or no other material assets or activities, and therefore has little or no independent capacity to repay the obligation;\n 4. the terms of the obligation give the ADI a substantial degree of control over the assets and the income that it generates; and\n 5. as a result of the characteristics detailed in 26(a) to 26(d) of this paragraph, the primary source of repayment of the obligation is the income generated by the assets rather than the independent capacity of a broader commercial enterprise.\n2. The specialised lending asset class includes the following three sub-classes:\n 1. project finance, refers to the method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the loan;\n 2. object finance, refers to the method of funding the acquisition of equipment where the repayment of the loan is dependent on the cash flows generated by the specific assets that have been financed and pledged or assigned to the lender; and\n 3. commodities finance, refers to short-term lending to finance reserves, inventories, or receivables of exchange-traded commodities, where the loan will be repaid from the proceeds of the sale of the commodity and the borrower has no independent capacity to repay the loan.\n3. Where an issue-specific external credit rating is available for a specialised lending exposure, an ADI must apply the risk weights in Table 10.\n4. An ADI must apply the risk weights in Table 13 to its unrated specialised lending exposures, including any exposures with an issuer-specific external credit rating.\n\n1. Risk weights for unrated specialised lending exposures\n\n| | Risk weight (%) |\n| ------------------------------ | --------------- |\n| Project finance | 110 |\n| Object and commodities finance | 100 |","sortOrder":25},{"sectionNumber":"Retail exposures","sectionType":"part","heading":"Retail exposures","content":"# Retail exposures\n\n1. A retail exposure is any exposure to one or more individuals (that is, natural persons), that is not a property exposure or margin lending exposure.\n2. An ADI must apply the risk weights in Table 14 to its retail exposures, based on the product type.\n\n1. Risk weights for retail exposures\n\n| | Risk weight (%) |\n| ---------------------- | --------------- |\n| Credit card exposures | 75 |\n| Other retail exposures | 100 |","sortOrder":26},{"sectionNumber":"Margin lending exposures","sectionType":"part","heading":"Margin lending exposures","content":"# Margin lending exposures\n\n1. An ADI must apply a risk weight of 20 per cent to margin lending exposures secured by eligible financial collateral. Where a margin loan is secured by other collateral, an ADI must apply a risk weight of 100 per cent to its exposure.","sortOrder":27},{"sectionNumber":"Subordinated debt","sectionType":"part","heading":"Subordinated debt","content":"# Subordinated debt\n\n1. Subordinated debt includes any facility that is expressly subordinated to another facility, or has the effect of conveying economic subordination to another facility.[\\[10\\]](#_ftn10) Subordinated debt that is not required to be deducted from regulatory capital under APS 111 must be risk weighted at 150 per cent.","sortOrder":28},{"sectionNumber":"Equity","sectionType":"part","heading":"Equity","content":"# Equity\n\n1. Equity exposures must be defined on the basis of the economic substance of the instrument. Equity exposures include both direct and indirect ownership interests,[\\[11\\]](#_ftn11) whether voting or non-voting, in the assets and income of entities, including commercial enterprises and financial institutions. An instrument is considered to be an equity exposure if it meets the following criteria:\n 1. it is irredeemable, in that the return of invested funds can be achieved only by the sale of the investment, the sale of the rights to the investment or by the liquidation of the issuer;\n 2. it does not embody an obligation of the issuer; and\n 3. it conveys a residual claim on the assets or income of the issuer.\n2. Debt obligations and other securities, units in trusts, derivatives or other instruments which are structured for the purpose, or have the effect, of conveying the economic substance of equity ownership must be treated as equity exposures. This includes options and warrants on equities and short positions in equity securities. In addition, if a debt instrument is convertible into equity at the option of an ADI, it should be treated by the ADI as equity on conversion. If such an instrument is convertible at the option of the issuer or automatically by the terms of the instrument, it should be treated by the ADI as equity from inception.\n3. Equities that are recorded as a loan but arise from a debt/equity swap made as part of the orderly realisation or restructuring of the debt must be treated as an equity exposure.\n4. Instruments with a return directly linked to equities must be treated as equity exposures.\n5. An ADI must risk-weight equity exposures that are not required to be deducted from Regulatory Capital under APS 111 at:\n 1. 250 per cent if the equity exposure is listed on a recognised exchange, or where the equity exposure is to the ADI’s banking or insurance subsidiary at Level 1;[\\[12\\]](#_ftn12) and\n 2. 400 per cent if the equity exposure is not listed on a recognised exchange.","sortOrder":29},{"sectionNumber":"Leases","sectionType":"part","heading":"Leases","content":"# Leases\n\n1. Lease exposures include all lease and asset finance exposures, irrespective of the counterparty type, and include exposures generated by the leasing of right-of-use assets. For lease exposures, excluding residual value risk, an ADI must apply the risk weight of the counterparty, as specified in this Attachment.\n2. Where an ADI is exposed to residual value risk, such as when it acts as the lessor in operating leases, it must measure the aggregate residual value and apply the risk weights in Table 15 to the residual value of its leased assets.\n\n1. Risk weights for residual value under lease exposures\n\n| | Risk weight (%) applying to the portion of aggregate residual value ≤ 10% of Tier 1 capital | Risk weight (%) applying to the portion of aggregate residual value > 10% of Tier 1 capital |\n| --------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- |\n| Exposures to residual value | 100 | 250 |","sortOrder":30},{"sectionNumber":"Exposures through a third party","sectionType":"part","heading":"Exposures through a third party","content":"# Exposures through a third party\n\n1. An ADI must apply a risk weight of 150 per cent to credit exposures originated through a third party, where the ADI:\n 1. does not undertake the credit assessment and approval of the underlying borrower under its own credit risk policies and processes;\n 2. is unable to administer the workout or default processes; and\n 3. does not have direct recourse to the third party or underlying borrower in the event of default.\n\nThe risk weight prescribed in this paragraph must be applied to all such arrangements irrespective of the characterisation of the third party or underlying borrower.","sortOrder":31},{"sectionNumber":"Other exposures","sectionType":"part","heading":"Other exposures","content":"# Other exposures\n\n1. An ADI must apply the risk weights in Table 16 to all other exposures that are not property exposures or included within one of the other asset classes specified in this Attachment.\n\n1. Risk weights for other exposures\n\n| | Risk weight (%) |\n| ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- |\n| Cash owned and held at the ADI or in transit | 0 |\n| Gold bullion held at the ADI or held in another ADI on an allocated basis, to the extent the gold bullion assets are backed by gold bullion liabilities | 0 |\n| Cash items in the process of collection (e.g. cheques, draft and other items drawn on banks that are payable immediately upon presentation and that are in the process of collection) | 20 |\n| Investments in premises, plant and equipment, and all other fixed assets | 100 |\n| All other exposures not specified elsewhere | 100 |","sortOrder":32},{"sectionNumber":"Risk weight multiplier for certain expos","sectionType":"part","heading":"Risk weight multiplier for certain exposures with currency mismatch","content":"# Risk weight multiplier for certain exposures with currency mismatch\n\n1. For exposures originated after 1 January 2023, an ADI must apply a 1.5 times multiplier to the applicable risk weight for any unhedged retail or residential property exposure to individuals, where the lending currency differs from the currency of the borrower’s source of income.\n2. An unhedged exposure is an exposure to a borrower that has no natural or financial hedge against the foreign exchange risk resulting from the currency mismatch between the currency of the borrower’s income and the currency of the loan. A natural hedge exists where the borrower receives foreign currency income that matches the currency of a given loan. A financial hedge generally includes a legal contract with a financial institution. For the purpose of the application of the multiplier, an ADI may only treat an exposure as hedged where the natural or financial hedge covers at least 90 per cent of the loan repayment amount.","sortOrder":33},{"sectionNumber":"Attachment C — Off-balance sheet commitm","sectionType":"part","heading":"Attachment C — Off-balance sheet commitments","content":"## Attachment C – Off-balance sheet commitments\n\n1. A commitment is any arrangement that has been offered by the ADI and accepted by the borrower to extend credit, purchase assets or issue credit substitutes. It includes SFTs.\n\n1. A commitment includes any arrangement that can be unconditionally cancelled by the ADI at any time without prior notice to the borrower. It also includes any such arrangement that can be cancelled by the ADI if conditions set out in the facility documentation are not met, including conditions that must be met by the borrower or third parties (conditions precedent) prior to any initial or subsequent drawdown under the arrangement.\n2. Where an ADI enters into an arrangement that meets all of the following conditions, it may be excluded from the definition of commitment:\n 1. the ADI receives no fees or commissions to establish or maintain the arrangement;[\\[13\\]](#_ftn13)\n 2. the borrower is required to apply to the ADI for the initial and each subsequent drawdown;\n 3. the ADI has full authority, regardless of the fulfilment by the borrower of the conditions set out in the facility documentation, over the execution of each drawdown;[\\[14\\]](#_ftn14)\n 4. the ADI’s decision on the execution of each drawdown is made only after assessing the creditworthiness of the borrower immediately prior to drawdown. This assessment of creditworthiness must be undertaken by an independent party and, at a minimum, include confirmation of the borrower’s good credit standing and that no material adverse information has arisen subsequent to the limit approval or the most recent credit review that would affect the borrower’s creditworthiness;[\\[15\\]](#_ftn15) and\n 5. the borrower is a corporate counterparty that is closely monitored on an ongoing basis, and is not an SME retail borrower.\n3. In respect of margin lending, the committed amount is the maximum amount that the borrower can draw down based on the terms of the loan (such as the notional credit limit and the maximum allowable LVR) and the value of the security underlying the loan. However, if an ADI does not adjust the credit limit before a drawdown in response to a decline in security value, then the ADI must use the original amount in the loan contract that is independent of the security value.\n4. Where a commitment exists, an ADI must multiply the committed but undrawn amount of the exposure by the relevant CCF in Table 17, and then risk-weight the exposure according to the relevant requirements set out in Attachments A, B and D to this Prudential Standard.\n\n1. CCFs\n\n| Transaction type | CCF (%) |\n| ---------------------------------------------------------------------------------------------------- | ------- |\n| Direct credit substitutes | 100 |\n| Sale and repurchase agreements and asset sales with recourse[16] | 100 |\n| Lending of securities or posting of securities as collateral | 100 |\n| Forward asset purchases, forward deposits and partly paid shares and securities[17] | 100 |\n| Other off-balance sheet items that are credit substitutes | 100 |\n| Unsettled securities, commodities and foreign exchange transactions accounted for at settlement date | 100 |\n| Other commitments with certain drawdown | 100 |\n| Note issuance and revolving underwriting facilities | 50 |\n| Performance-related contingencies | 50 |\n| Other commitments | 40 |\n| Short-term self-liquidating trade letters of credit arising from the movement of goods[18] | 20 |\n| Intraday limits | 0 |\n| Irrevocable standby commitments under industry support arrangements | 0 |\n\n1. Where an ADI has given a commitment to provide an off-balance sheet exposure, it may apply the lower of the CCFs applicable to the commitment and the off-balance sheet exposure.","sortOrder":34},{"sectionNumber":"Attachment D — Unsettled and failed tran","sectionType":"part","heading":"Attachment D — Unsettled and failed transactions","content":"## Attachment D – Unsettled and failed transactions\n\n1. Delivery-versus-payment (DvP) transactions include any transaction settled through a system which provides for the simultaneous exchange of securities or commodities for cash, and expose an ADI to the risk of loss on the difference between the transaction valued at the agreed settlement price and the transaction valued at the current market price. This includes payment-versus-payment transactions.\n2. An ADI must apply the risk weights in Table 18 to all DvP transactions, excluding SFTs, which remain unsettled after their due delivery dates. The amount that must be multiplied by the relevant risk weight is the positive current exposure amount of the DvP transaction, i.e. the difference between the agreed settlement price of the transaction and the current market price of the transaction where this would result in a loss to the ADI.\n\n1. Risk weights for DvP transactions\n\n| Number of business days after settlement date | Risk weight (%) |\n| --------------------------------------------- | --------------- |\n| 5 to 15 | 100 |\n| 16 to 30 | 625 |\n| 31 to 45 | 937.5 |\n| 46 or more | 1250 |\n\n1. An ADI must hold Regulatory Capital against a non-DvP transaction which exposes the ADI to the risk of loss on the full amount of cash paid or deliverables delivered, where:\n 1. it has paid for debt instruments, equities, foreign currencies or commodities before receiving them or it has delivered debt instruments, equities, foreign currencies or commodities before receiving payment for them; and\n 2. in the case of a cross-border transaction, one day or more has elapsed since it made that payment or delivery.\n2. An ADI must calculate the capital requirement for a non-DvP transaction as follows:\n 1. from the business day after the ADI has made its payment or delivery for up to and including four business days after the counterparty payment or delivery is due, the ADI must treat the transaction as an exposure; and\n 2. from five business days after the ADI has made its payment or delivery until extinction of the transaction, the ADI must apply a 1250 per cent risk weight to the value transferred plus the positive current exposure amount.\n3. Where a non-DvP transaction must be treated as an exposure in accordance with paragraph 4(a) of this Attachment, an ADI may:\n 1. apply the relevant risk weight based on the counterparty as detailed in Attachment B to this Prudential Standard; or\n 2. where exposures are not material, apply a 100 per cent risk weight provided that all such exposures are risk-weighted consistently.","sortOrder":35},{"sectionNumber":"Attachment E — Defaulted exposures","sectionType":"part","heading":"Attachment E — Defaulted exposures","content":"## Attachment E – Defaulted exposures\n\n1. Where an exposure is in default, an ADI must apply the risk weights in Table 19 or Table 20 to the exposure amount, net of any provisions for defaulted exposures and partial write-offs.\n\n1. An ADI may recognise eligible credit risk mitigation in calculating the exposure amount.","sortOrder":36},{"sectionNumber":"Risk weights for residential property ex","sectionType":"part","heading":"Risk weights for residential property exposures","content":"# Risk weights for residential property exposures\n\n1. An ADI must apply the risk weights in Table 19 to its defaulted residential property exposures.\n\n1. Risk weights for defaulted residential property exposures\n\n| | Risk weight (%) |\n| ------------------------------------------------- | --------------- |\n| Owner-occupied principal-and-interest with LMI | 80 |\n| Owner-occupied principal-and-interest without LMI | 100 |\n| Other standard residential property with LMI | 95 |\n| Other standard residential property without LMI | 120 |\n| Non-standard loans | 150 |","sortOrder":37},{"sectionNumber":"Risk weights for other defaulted exposur","sectionType":"part","heading":"Risk weights for other defaulted exposures","content":"# Risk weights for other defaulted exposures\n\n1. An ADI must apply the risk weights in Table 20 to its defaulted exposures that are not residential property exposures.\n\n1. Risk weights for other defaulted exposures\n\n| | Risk weight (%) |\n| ------------------------------------------------------------------------------------------ | --------------- |\n| Provisions for the defaulted exposure are ≥ 20 per cent of the outstanding exposure amount | 100 |\n| Provisions for the defaulted exposure are < 20 per cent of the outstanding exposure amount | 150 |","sortOrder":38},{"sectionNumber":"Attachment F — External credit ratings","sectionType":"part","heading":"Attachment F — External credit ratings","content":"## Attachment F – External credit ratings\n\n1. An ADI may only use the solicited ratings of ECAIs to determine the credit rating grades that correspond to the risk weights for counterparties and exposures.[\\[19\\]](#_ftn19) Ratings must be used consistently for each type of exposure.\n2. An ADI must only use an ECAI rating that takes into account and reflects the entire amount of credit risk exposure that the ADI has with regard to all amounts owed to it.\n3. Where an ADI uses the ratings of ECAIs, it must perform due diligence to ensure that the external ratings appropriately and conservatively reflect the creditworthiness of the counterparty. If the due diligence analysis reflects higher risk characteristics than that implied by the exposure’s external rating, an ADI must assign a risk weight at least one bucket higher than that determined by the external rating. Due diligence analysis must not result in the application of a lower risk weight than that determined by the external rating.\n4. An ADI must not use credit ratings for one entity within a corporate group to determine the risk weight for other entities within the same group. If a rated entity has guaranteed another entity’s exposure to the ADI, the guarantee may be recognised for risk-weighting purposes if the criteria set out in Attachment I to this Prudential Standard are satisfied.","sortOrder":39},{"sectionNumber":"Issue-specific and issuer ratings","sectionType":"part","heading":"Issue-specific and issuer ratings","content":"# Issue-specific and issuer ratings\n\n1. Where an ADI has an exposure with an issue-specific rating, the risk weight of the exposure must be assigned based on this rating. Where an exposure does not have an issue-specific rating, the ADI must apply the following requirements:\n 1. where the counterparty has a specific rating for an issued debt, but the ADI’s exposure is not an investment in that particular debt, a credit rating which maps to a risk weight lower than that which applies to an unrated exposure may only be applied if the exposure ranks senior or pari passu in all respects to the rated debt issue. If the exposure does not rank senior or pari passu with the rated debt issue, then the ADI must treat the exposure as unrated and apply the corresponding risk weight;\n 2. where the counterparty has an issuer rating, only senior exposures to that counterparty may be assigned a risk weight that corresponds to the issuer rating. If either the issuer or a single issue has a rating grade that maps to a risk weight higher than that applied to unrated exposures, then an exposure to that counterparty which ranks pari passu or is subordinated to either the senior unsecured issuer rating or the exposure with a low credit rating grade must be assigned the same risk weight as is applicable to the low credit rating grade; and\n 3. where the counterparty has a specific high-quality rating that only applies to a limited class of liabilities, this rating may only be used for exposures that fall within that class.","sortOrder":40},{"sectionNumber":"Multiple assessments","sectionType":"part","heading":"Multiple assessments","content":"# Multiple assessments\n\n1. Where a counterparty has multiple ECAI general issuer ratings, or where an issue has multiple ECAI issue-specific ratings and these ratings correspond to multiple credit rating grades, an ADI must apply the following requirements:\n 1. where there are two ratings that correspond to different credit rating grades, the credit rating grade that corresponds to the higher risk weight must be used; or\n 2. where there are three or more ratings that correspond to different credit rating grades, the credit rating grades corresponding to the two lowest risk weights must be referred to and the higher of those two risk weights must be used.","sortOrder":41},{"sectionNumber":"Domestic and foreign currency exposures","sectionType":"part","heading":"Domestic and foreign currency exposures","content":"# Domestic and foreign currency exposures\n\n1. An ADI must not use an ECAI rating that refers to an exposure denominated in a particular currency to derive the credit rating grade for another exposure to the same counterparty if that exposure is denominated in another currency.","sortOrder":42},{"sectionNumber":"Mapping of credit rating grades","sectionType":"part","heading":"Mapping of credit rating grades","content":"# Mapping of credit rating grades\n\n1. Where the ECAI is S&P Global Ratings, Moody’s or Fitch Ratings, ratings must be mapped in accordance with Table 21 and Table 22.\n\n1. Recognised long-term ratings and equivalent credit rating grades\n\n| Credit rating grade | S&P Global Ratings | Moody’s | Fitch Ratings |\n| ------------------- | ------------------ | --------------- | --------------- |\n| 1 | AAAAA+AAAA- | AaaAa1Aa2Aa3 | AAAAA+AAAA- |\n| 2 | A+AA- | A1A2A3 | A+AA- |\n| 3 | BBB+BBBBBB- | Baa1Baa2Baa3 | BBB+BBBBBB- |\n| 4 | BB+BBBB- | Ba1Ba2Ba3 | BB+BBBB- |\n| 5 | B+BB- | B1B2B3 | B+BB- |\n| 6 | CCC+CCCCCC-CCCD | Caa1Caa2Caa3CaC | CCC+CCCCCC-CCCD |\n\n1. Recognised short-term ratings and equivalent credit rating grades\n\n| Credit rating grade | S&P Global Ratings | Moody’s | Fitch Ratings |\n| ------------------- | ------------------ | ------- | ------------- |\n| 1 | A-1 | P-1 | F-1 |\n| 2 | A-2 | P-2 | F-2 |\n| 3 | A-3 | P-3 | F-3 |\n| 4 | Others | Others | Others |","sortOrder":43},{"sectionNumber":"Attachment G — Collateralised transactio","sectionType":"part","heading":"Attachment G — Collateralised transactions","content":"## Attachment G – Collateralised transactions\n\n1. This Attachment specifies how an ADI:\n 1. may apply credit risk mitigation to transactions secured by received collateral, to reduce its exposure amount for the purpose of calculating its Regulatory Capital requirement; and\n 2. must determine the EAD for SFTs or, for ADIs that use the simple approach, the risk weights.\n\n1. In this Attachment:\n 1. ‘received collateral’ refers to eligible financial collateral (as defined in paragraphs 14 or 22 of this Attachment) that an ADI receives from the counterparty in a transaction, including where the counterparty has lent those securities to the ADI, or the transaction is a reverse repurchase agreement from the ADI’s perspective; and\n 2. ‘posted collateral’ refers to collateral that an ADI posts to the counterparty in a transaction, including where the ADI has lent those securities to the counterparty, or the transaction is a repurchase agreement from the ADI’s perspective.\n2. An ADI must select either the simple approach or the comprehensive approach and apply that approach consistently to all of its banking book exposures for which it has received collateral. An ADI that is approved to use the internal ratings-based approach to credit risk is not permitted to use the simple approach.\n3. For trading book exposures, an ADI must use the comprehensive approach where it has received collateral from the counterparty.\n4. Where an ADI acting as an agent in a SFT provides a guarantee that its principal will perform its obligations, the risk to the ADI is the same as if the ADI had entered into the transaction as the principal. In such circumstances, the ADI must calculate a Regulatory Capital requirement as if it were the principal.","sortOrder":44},{"sectionNumber":"Minimum conditions for collateralised tr","sectionType":"part","heading":"Minimum conditions for collateralised transactions","content":"# Minimum conditions for collateralised transactions\n\n1. There must be a contract between the ADI and the party lodging received collateral which establishes the ADI’s direct, explicit, irrevocable and unconditional recourse to the received collateral. In the case of cash collateral, this may include a contractual right of set-off on credit balances, but a common law right of set-off is insufficient on its own to satisfy this condition.\n2. An ADI must take all steps necessary to obtain and maintain an enforceable security interest in the received collateral. The legal mechanism by which collateral is pledged or transferred must allow the ADI the right to liquidate or take legal possession of the received collateral in a timely manner. An ADI must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counterparty and liquidating the received collateral are observed.\n3. In the event of the counterparty’s default, any requirement on the ADI to serve notice on the party lodging the received collateral must not unnecessarily impede the ADI’s recourse to the received collateral.\n4. Where posted or received collateral is held by a custodian or a third party, the ADI must take reasonable steps to ensure that the custodian or third party segregates the collateral from other assets.\n5. Where the received collateral is lodged with an overseas branch of the ADI, the branch holding the collateral must be bound to act in accordance with the agreement between the ADI and the party lodging the received collateral.\n6. Where the received collateral is lodged by a third party, that third party must indemnify or guarantee the performance of the counterparty’s obligations (or those of the party on which a claim is held) to the ADI. The ADI must ensure that the indemnity or guarantee is legally enforceable (e.g. that it will not fail for lack of consideration).\n7. An ADI must ensure that sufficient resources are devoted to the orderly operation of margin agreements with OTC derivative and securities-financing counterparties, as measured by the timeliness and accuracy of its outgoing calls and response time to incoming calls. An ADI must have collateral risk management policies in place to control, monitor and report:\n 1. the risk to which margin agreements expose it, such as the volatility and liquidity of the securities exchanged as collateral;\n 2. the concentration risk to particular types of collateral;\n 3. the re-use of collateral (both cash and non-cash) including the potential liquidity shortfalls resulting from the re-use of collateral received from counterparties; and\n 4. the surrender of rights on collateral posted to counterparties.","sortOrder":45},{"sectionNumber":"The simple approach","sectionType":"part","heading":"The simple approach","content":"# The simple approach\n\n1. For received collateral to be recognised under the simple approach, it must be pledged for at least the life of the exposure (i.e. maturity mismatches are not permitted) and be marked-to-market and revalued with a minimum frequency of six months. The release of received collateral by the ADI must be conditional upon the repayment of the exposure. Received collateral may be reduced in proportion to the amount of the reduction in the exposure amount.","sortOrder":46},{"sectionNumber":"Eligible financial collateral under the ","sectionType":"division","heading":"Eligible financial collateral under the simple approach","content":"### Eligible financial collateral under the simple approach\n\n1. An ADI using the simple approach may only recognise the following items as eligible financial collateral:\n 1. cash collateral (cash, certificates of deposit and bank bills issued by the ADI) on deposit with the ADI;[\\[20\\]](#_ftn20)\n 2. gold bullion;\n 3. debt securities rated by an ECAI that have a credit rating grade of either:\n 1. four (or better) for long-term securities issued by sovereigns;[\\[21\\]](#_ftn21) or\n 2. three (or better) for short-term or long-term securities issued by other counterparties;\n 4. debt securities not rated by an ECAI where:\n 1. the securities are issued by a bank as senior debt and are listed on a recognised exchange;\n 2. all rated issues of the same seniority by the issuing bank have a long-term or short-term credit rating grade of at least three; and\n 3. the ADI holding the security has no information suggesting that the security justifies a rating below this level;\n 5. senior securitisation exposures, as defined in APS 120, with an external credit rating grade of one;\n 6. units in a listed or unlisted trust where:\n 1. the unit price of the trust is publicly quoted on a daily basis;\n 2. the trust is limited to investing in the instruments detailed in paragraphs 14(a) to 14(e) of this Attachment;[\\[22\\]](#_ftn22) and\n 3. for unlisted trusts, the ADI can redeem its investment within three business days.\n2. Resecuritisation exposures, as defined in APS 120, are not eligible financial collateral.","sortOrder":47},{"sectionNumber":"Risk weights under the simple approach","sectionType":"division","heading":"Risk weights under the simple approach","content":"### Risk weights under the simple approach\n\n1. Under the simple approach, the portion of an exposure that is secured by received collateral may be risk-weighted according to the risk weight of the received collateral. The risk weight on that portion is subject to a floor of 20 per cent, except under the conditions specified in paragraphs 18 to 20 of this Attachment. The unsecured portion of an exposure must be risk-weighted according to the risk weight applicable to the original counterparty.\n2. Where cash on deposit, certificates of deposit and bank bills issued by the ADI are held as received collateral at a third-party bank in a non-custodial arrangement, and are pledged or assigned to the ADI and the pledge or assignment is unconditional and irrevocable, the exposure amount covered by the received collateral may be assigned the risk weight of the third-party bank, determined in accordance with Attachment B to this Prudential Standard.\n3. A zero per cent risk weight may be applied to collateralised transactions where the exposure and the collateral are denominated in the same currency and either:\n 1. the collateral is cash on deposit as defined in paragraph 14(a) of this Attachment; or\n 2. the collateral is in the form of sovereign securities eligible for a zero per cent risk weight as detailed in Attachment B to this Prudential Standard, and its market value has been discounted by 20 per cent.\n4. SFTs that fulfil all of the following conditions may be risk-weighted at 10 per cent, or at zero per cent where the counterparty is a core market participant as defined in paragraph 20:\n 1. both the exposure and the collateral are cash, or a sovereign security qualifying for a zero per cent risk weight as set out in Attachment B to this Prudential Standard;\n 2. both the exposure and the collateral are denominated in the same currency;\n 3. either the transaction is overnight, or both the exposure and the collateral are marked-to-market daily and are subject to daily remargining;\n 4. following a counterparty’s failure to remargin, the time between the last mark-to-market before the failure to remargin and the liquidation of the collateral is no more than four business days;\n 5. the transaction is settled across an established settlement system for that type of transaction;\n 6. the documentation for the transaction is standard market documentation;\n 7. the documentation for the transaction specifies that if the counterparty fails to satisfy an obligation to deliver cash, securities or a margin call, or otherwise defaults, the transaction is immediately terminable; and\n 8. upon any default event, regardless of whether the counterparty is insolvent or bankrupt, the ADI has an unequivocal, legally enforceable right to immediately seize and liquidate the collateral.\n5. The following entities are core market participants:\n 1. the Australian Government and the Reserve Bank of Australia;\n 2. sovereigns that qualify for a zero per cent risk weight in accordance with Attachment B to this Prudential Standard;\n 3. banks;\n 4. other financial institutions (including insurance companies) eligible for a 20 per cent risk weight as set out in Attachment B to this Prudential Standard; and\n 5. qualifying central counterparties, as defined in APS 180.","sortOrder":48},{"sectionNumber":"The comprehensive approach","sectionType":"part","heading":"The comprehensive approach","content":"# The comprehensive approach\n\n1. An ADI using the comprehensive approach may take into account the risk mitigating effects of any eligible collateral, in calculating the EAD for each counterparty.","sortOrder":49},{"sectionNumber":"Calculation of Regulatory Capital for co","sectionType":"division","heading":"Calculation of Regulatory Capital for collateralised transactions","content":"### Calculation of Regulatory Capital for collateralised transactions\n\n1. For a collateralised transaction under the comprehensive approach, including SFTs, an ADI must adjust EAD as follows:\n\n![Start formula A formula for E*, the adjusted EAD, for a collateralised transaction under the comprehensive approach, including SFTs end formula.](image.003.png)\n\nwhere:\n\nE\\* is the adjusted EAD\n\nE’ is ![A formula for E', an element in the formula for E*, the adjusted EAD, for a collateralised transaction under the comprehensive approach, including SFTs.](image.004.png) where Ej is the EAD of the j\\-th item of exposure or posted collateral under the transaction, prior to haircuts or adjustment for received collateral. For OTC derivatives to which the ADI applies the adjusted CEM (refer to Attachment E to APS 180), E’ is the credit equivalent amount of the OTC derivative without adjustment for the impact of collateral\n\nHj is the haircut appropriate to the j\\-th item of exposure or posted collateral under the transaction, calculated in accordance with paragraph 28 of this Attachment\n\nCi is the current value of the i\\-th item of received collateral under the transaction, adjusted for any maturity mismatch in accordance with paragraphs 24 to 27 of this Attachment\n\nHi is the haircut appropriate to the i\\-th item of received collateral under the transaction, calculated in accordance with paragraph 28 of this Attachment\n\nHfx,i is the haircut appropriate for currency mismatch between the exposure and the i\\-th item of received collateral under the transaction, calculated in accordance with paragraph 29 of this Attachment\n\nA is the margining frequency adjustment factor determined in accordance with paragraph 32 of this Attachment.","sortOrder":51},{"sectionNumber":"Collateral maturity mismatch","sectionType":"subdivision","heading":"Collateral maturity mismatch","content":"#### Collateral maturity mismatch\n\n1. A maturity mismatch exists where the residual maturity of the term of lodgement of the collateral is less than the maturity of the exposure covered by the collateral.\n2. Where there is a maturity mismatch, the collateral may only be recognised where the original maturity of the term of lodgement of the collateral is greater than or equal to 12 months and the residual maturity is greater than or equal to 3 months.\n3. For the purpose of determining maturity:\n 1. the effective maturity of the underlying exposure must be calculated using the longest possible remaining time before the counterparty is scheduled to fulfil its obligation; and\n 2. for the collateral, an ADI must take into account any clause or incentive within the documentation supporting the transaction that may reduce its term of lodgement so that the shortest possible effective maturity is used.\n4. Where there is a maturity mismatch, an ADI must apply the following adjustment:\n\n![Start formula C equals P times start fraction t minus 0.25 over T minus 0.25 end fraction end formula.](image.005.png)\n\nwhere:\n\nC \\= value of the collateral adjusted for maturity mismatch\n\nP \\= collateral amount\n\nt \\= min (T, residual maturity of the term of lodgement of the collateral) expressed in years\n\nT \\= min (5, residual maturity of the exposure) expressed in years.","sortOrder":52},{"sectionNumber":"Supervisory haircuts","sectionType":"subdivision","heading":"Supervisory haircuts","content":"#### Supervisory haircuts\n\n1. An ADI must use the supervisory haircuts set out in Table 23 to determine the haircuts for the collateral (Hi) and the exposure (Hj).\n\n1. Supervisory haircuts\n\n```html\n

Credit rating grade for debt securities

Residual maturity

Sovereign (%)

Other issuer[23] (%)

Securitisation exposure[24] (%)

1 (long- and short-term)

1 year

0.5

1

2

> 1 year, 3 years

2

3

8

> 3 years, 5 years

4

> 5 years, 10 years

4

6

16

> 10 years

12

2-3 (long- and short-term) and unrated bank securities[25]

1 year

1

2

Not eligible

> 1 year, 3 years

3

4

> 3 years, 5 years

6

> 5 years, 10 years

6

12

> 10 years

20

4 (long-term)

All

15

Not eligible

Main index equities (including convertible bonds) and gold

20

Other equities and convertible bonds listed on a recognised exchange

30

Securities that are posted collateral but not eligible financial collateral

30

Units in trusts

Highest haircut applicable to any security in which the trust can invest

Cash[26]

0

Securities forming part of posted or received collateral for transactions that satisfy the criteria in paragraphs 19 and 20 of this Attachment, provided that, if the transaction is in a netting set, all transactions in that netting set satisfy those criteria[27]

0

\n```\n\n1. An ADI must apply a haircut of 8 per cent for currency risk (Hfx,i) where the exposure and collateral are denominated in different currencies, and zero per cent where they are denominated in the same currency.","sortOrder":53},{"sectionNumber":"Adjustments for different holding period","sectionType":"subdivision","heading":"Adjustments for different holding periods and non-daily mark-to-market or remargining","content":"#### Adjustments for different holding periods and non-daily mark-to-market or remargining\n\n1. An ADI must apply the minimum holding periods and conditions in Table 24 to SFTs, other capital-market-driven transactions (e.g. OTC derivative transactions) and secured lending.\n\n1. Minimum holding periods and conditions\n\n| Transaction type | Minimum holding period (business days) | Condition |\n| --------------------------------- | -------------------------------------- | ----------------- |\n| SFTs | 5 | Daily remargining |\n| Other capital market transactions | 10 | Daily remargining |\n| Secured lending | 20 | Daily revaluation |\n\n1. Under the following circumstances, an ADI must apply a higher minimum holding period:\n 1. for all netting sets where the number of trades exceeds 5,000 at any point during a quarter, an ADI must set the minimum holding period to 20 business days for the following quarter;\n 2. for netting sets containing one or more trades involving either illiquid collateral, or an OTC derivative that cannot be easily replaced, an ADI must set the minimum holding period to 20 business days. An ADI must determine both liquidity and ease of replacement in the context of stressed market conditions; and\n 3. if an ADI has experienced more than two margin call disputes on a particular netting set over the previous two quarters that have lasted longer than the applicable minimum holding period (before consideration of this provision), the ADI must use a minimum holding period that is at least double the supervisory floor for that netting set for the subsequent two quarters.\n\nIn determining the holding period, an ADI must consider whether trades or securities it holds as collateral are concentrated in a particular counterparty and whether, if that counterparty exited the market precipitously, the ADI would be able to replace its trades.\n\n1. An ADI must calculate the margining frequency adjustment factor for a transaction or netting set as:\n\n![Start formula A equals square root of start fraction N subscript R plus open round bracket T subscript M minus 1 close round bracket over 10 end fraction end formula.](image.006.png)\n\nwhere:\n\nTM is the minimum holding period for the type of transaction determined in accordance with paragraphs 30 to 31 of this Attachment\n\nNR is the number of business days between remarginings or revaluations.","sortOrder":54},{"sectionNumber":"Treatment of SFTs covered by master nett","sectionType":"division","heading":"Treatment of SFTs covered by master netting agreements","content":"### Treatment of SFTs covered by master netting agreements\n\n1. For SFTs covered by an eligible bilateral netting agreement that meets the requirements detailed in Attachment H to this Prudential Standard, an ADI that uses the comprehensive approach must calculate the EAD as:\n\n![Start formula A formula for E*, the adjusted EAD of the netting set, that an ADI that uses the comprehensive approach must use to calculate EAD, for SFTs covered by an eligible bilateral netting agreement that meets the requirements in Attachment H to this Prudential Standard end formula.](image.007.png)\n\nwhere:\n\nE\\* is the adjusted EAD of the netting set\n\nEi is the current value of all cash lent and non-cash posted collateral\n\nCj is the current value of all cash borrowed and non-cash received collateral\n\n![Start formula net exposure equals absolute value of the sum across S of E subscript S H subscript S end formula.](image.008.png)\n\n![Start formula gross exposure equals the sum across S of E subscript S absolute value of H subscript S end formula.](image.009.png)\n\nEs is the net current value of each security issuance under the netting set (always a positive value)\n\nHs is the haircut appropriate to Es, as set out in Table 23 and scaled by the margining frequency adjustment factor in paragraph 32 of this Attachment. Hs has a positive (negative) sign if the security is posted (received) collateral\n\nN is the number of security issues contained in the netting set (except that issuances where the value of Es is less than one tenth of the value of the largest Es in the netting set are not included in the count)\n\nEfx is the absolute value of the net position in each currency fx different from the settlement currency\n\nHfx is the haircut appropriate for currency mismatch of currency fx.","sortOrder":55},{"sectionNumber":"Attachment H — Netting","sectionType":"part","heading":"Attachment H — Netting","content":"## Attachment H – Netting\n\n1. An ADI may reduce its exposure amount, for the purpose of calculating its Regulatory Capital requirement, through the application of close-out netting or netting by novation, in accordance with the requirements set out in this Attachment.\n\n1. An ADI that chooses to net transactions must do so on a consistent basis, and must apply netting to all transactions in both the banking book and trading book that are covered by a netting agreement.\n2. An ADI that applies netting for Regulatory Capital purposes must have a netting policy that, at a minimum, addresses the requirements in this Prudential Standard. The netting policy must apply to all transactions subject to netting and include systems and controls for:\n 1. monitoring and reporting netted transactions on a gross and net basis; and\n 2. monitoring and managing roll-off risk and termination risk.\n3. An ADI must maintain adequate records to support the application of the netting agreement.","sortOrder":56},{"sectionNumber":"Use of netting","sectionType":"part","heading":"Use of netting","content":"# Use of netting\n\n1. For Regulatory Capital purposes, an ADI may only net the following types of transactions:\n 1. on-balance sheet loans and deposits;\n 2. SFTs; and\n 3. OTC derivative transactions (across both the banking and trading books) with a single counterparty. This may include netting across different types of derivatives, but not across derivatives and SFTs.\n2. An ADI may only net internal transactions between the banking book and trading book if:\n 1. the netted transactions are marked-to-market daily, where applicable;[\\[28\\]](#_ftn28) and\n 2. any collateralised instruments used in the transactions comply with the criteria for eligible collateral in the banking book as detailed in Attachment G to this Prudential Standard.","sortOrder":57},{"sectionNumber":"On-balance sheet netting","sectionType":"part","heading":"On-balance sheet netting","content":"# On-balance sheet netting\n\n1. An ADI may only use the net exposures of loans and deposits as the basis for its RWA calculation where it:\n 1. has a well-founded basis for concluding that the netting or offsetting agreement is legally enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt;\n 2. is able at any time to determine those loans and deposits with the same counterparty that are subject to the netting agreement, and the deposits meet the criteria for eligible financial collateral;\n 3. monitors and controls its roll-off risks; and\n 4. monitors and controls the exposures on a net basis.\n2. Where all of the conditions in paragraph 7 of this Attachment are satisfied, an ADI may net loans and deposits to calculate RWA by applying the relevant requirements under either the simple or comprehensive approach as set out in Attachment G to this Prudential Standard. For this purpose, loans must be treated as exposures and deposits must be treated as eligible financial collateral.","sortOrder":58},{"sectionNumber":"Eligible bilateral netting agreement","sectionType":"part","heading":"Eligible bilateral netting agreement","content":"# Eligible bilateral netting agreement\n\n1. An eligible bilateral netting agreement, which includes a master netting agreement, is a netting agreement with a counterparty which:\n 1. provides the non-defaulting party the right to terminate and close out, in a timely manner, all transactions under the netting agreement upon an event of default, including in the event of insolvency or bankruptcy of the counterparty;[\\[29\\]](#_ftn29)\n 2. provides for the netting of gains and losses on transactions (including the value of any collateral) terminated and closed out under it, so that only a single net amount is owed by one party to the other;[\\[30\\]](#_ftn30)\n 3. allows for the prompt liquidation or set-off of collateral upon the event of default;\n 4. is legally enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt; and\n 5. does not include a walkaway clause (i.e. any clause which, in the event of default of a counterparty, permits a non-defaulting counterparty to make limited payments only, or no payments at all, to a defaulting party, even if the defaulting party is a net creditor).","sortOrder":59},{"sectionNumber":"Legal enforceability","sectionType":"part","heading":"Legal enforceability","content":"# Legal enforceability\n\n1. To ensure the legal enforceability of a netting agreement, an ADI must:\n 1. obtain a written and reasoned legal opinion that concludes that in the event of default, liquidation, bankruptcy or other similar circumstances of a party to the netting agreement, the relevant courts and authorities would find the ADI’s exposure is limited to the single net sum determined in the netting agreement under:\n 1. the law of the jurisdiction in which the counterparty is incorporated, formed or resides (in the case of a natural person), and if a foreign branch of the counterparty is involved, the law of the jurisdiction in which the branch is located;\n 2. the law that governs the individual transactions involved; and\n 3. the law that governs any contract or agreement necessary to give effect to the netting; and\n 2. have policies and procedures in place to ensure that the legal enforceability of netting agreements is kept under review in response to possible changes in relevant laws.\n2. An ADI must not recognise a netting agreement for Regulatory Capital purposes if there is any doubt as to its legal enforceability. Where an ADI becomes aware that a regulator or supervisor of a counterparty has given notice that it is not satisfied that netting is enforceable under the laws of the regulator’s or supervisor’s home country, it must not recognise the netting agreement for Regulatory Capital purposes regardless of any legal opinion obtained by the ADI.","sortOrder":60},{"sectionNumber":"Attachment I — Guarantees","sectionType":"part","heading":"Attachment I — Guarantees","content":"## Attachment I – Guarantees\n\n1. Where an ADI’s exposure to a counterparty is covered by a guarantee from an eligible guarantor, an ADI may substitute the risk weight of the counterparty for the risk weight of the guarantor for the covered portion of the exposure.[\\[31\\]](#_ftn31) The uncovered portion of the exposure must be risk-weighted according to the risk weight applicable to the original counterparty.","sortOrder":61},{"sectionNumber":"Minimum requirements","sectionType":"part","heading":"Minimum requirements","content":"# Minimum requirements\n\n1. To be recognised as eligible CRM, a guarantee must:\n 1. represent a direct claim on an eligible guarantor;\n 2. be an explicitly documented obligation assumed by the guarantor;\n 3. be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible;\n 4. be irrevocable, except in the case of non-payment by a protection purchaser of money due in respect of the credit protection contract. The guarantee must not contain any clauses that would allow the guarantor to unilaterally cancel the cover of the guarantee, or that would increase the effective cost of cover as a result of deteriorating credit quality in the guaranteed exposure;[\\[32\\]](#_ftn32)\n 5. be unconditional. The guarantee must not include any clauses that are outside the direct control of the ADI, or that could prevent the guarantor from being obliged to pay out in a timely manner in the event that the underlying counterparty fails to make the payment(s) due;\n 6. on the default or non-payment of the counterparty, allow the ADI to pursue, in a timely manner, the guarantor for any monies outstanding under the documentation governing the transaction. The ADI must have the right to receive payment from the guarantor without first having to take legal action in order to pursue the counterparty for payment; and\n 7. cover all types of payments the underlying borrower is expected to make under the documentation governing the transaction. Where a guarantee covers payment of principal only, interest and other amounts not covered by the guarantee must be treated as uncovered.","sortOrder":62},{"sectionNumber":"Eligible guarantors","sectionType":"part","heading":"Eligible guarantors","content":"# Eligible guarantors\n\n1. An ADI must only recognise guarantees provided by the following entities when they have a lower risk weight than the counterparty:\n 1. sovereigns;\n 2. banks;\n 3. other entities that are externally rated, where credit protection is provided to a non-securitisation exposure. This includes guarantees provided by parent, subsidiary and affiliate companies where they have a lower risk weight than the borrower; and\n 4. where credit protection is provided to a securitisation exposure, other entities with a credit rating grade of three or better and that were externally rated two or better at the time the credit protection was provided. This also includes guarantees provided by parent, subsidiary and affiliated companies where they have a lower risk weight than the borrower.\n2. A claim that is indirectly guaranteed by the Australian Government (i.e. the Commonwealth’s guarantee of the entity that provides the guarantee) may be treated as guaranteed by the Australian Government provided that:\n 1. the indirect guarantee covers all credit risk elements of the claim;\n 2. both the original guarantee and the indirect guarantee meet all the requirements detailed in paragraph 2 of this Attachment, except that the indirect guarantee need not be direct and explicit to the original claim; and\n 3. the ADI is satisfied that the cover of the indirect guarantee is robust and there is no historical evidence to suggest that the coverage of the indirect guarantee is not equivalent to that of a direct guarantee of the Australian Government.\n3. Letters of comfort do not qualify as eligible guarantees for CRM purposes.","sortOrder":63},{"sectionNumber":"Materiality thresholds","sectionType":"part","heading":"Materiality thresholds","content":"# Materiality thresholds\n\n1. Where a guarantee provides for a materiality threshold on payments below which no payment will be made in the event of loss, it is equivalent to a retained first loss position and must be deducted from Common Equity Tier 1 Capital in accordance with APS 111\\. This deduction will be capped at the amount of capital the ADI would be required to hold against the full value of the underlying exposure.","sortOrder":64},{"sectionNumber":"Proportional and tranched cover","sectionType":"part","heading":"Proportional and tranched cover","content":"# Proportional and tranched cover\n\n1. Where there is partial coverage of an exposure by a guarantee and the covered and uncovered portions are of equal seniority (i.e. the ADI and the guarantor share losses on a pro rata basis), capital relief will be afforded on a proportional basis. This means that the covered portion of the exposure will receive the treatment applicable to eligible guarantees with the remainder treated as uncovered.\n2. Where there is partial coverage of an exposure by a guarantee and there is a difference in seniority between the covered and uncovered portions of the exposure, then the arrangement is considered to be a synthetic securitisation and is subject to the requirements set out in APS 120.","sortOrder":65},{"sectionNumber":"Currency mismatch","sectionType":"part","heading":"Currency mismatch","content":"# Currency mismatch\n\n1. A currency mismatch exists where a guarantee is denominated in a different currency from that in which the exposure is denominated. In this case, the amount of the exposure deemed to be protected (Ga) must be reduced by the application of a haircut (Hfx) as follows:\n\n![Start formula G subscript a equals G times open bracket 1 minus H subscript fx close bracket end formula.](image.010.png)\n\nwhere:\n\n| G = | nominal amount of the guarantee |\n| ----- | ------------------------------------------------------------------------------------------------ |\n| Hfx = | haircut appropriate for the currency mismatch between the guarantee and the underlying exposure. |\n\n1. Where there is a currency mismatch, an ADI must apply a haircut of 8 per cent (based on a 10 business day holding period and daily marking-to-market). The haircut must be adjusted depending on the actual frequency of revaluation of the currency mismatch, in accordance with paragraph 32 of Attachment G to this Prudential Standard.","sortOrder":66},{"sectionNumber":"Maturity mismatch","sectionType":"part","heading":"Maturity mismatch","content":"# Maturity mismatch\n\n1. A maturity mismatch exists where the residual maturity of a guarantee is less than the maturity of the exposure covered by the guarantee.\n2. Where there is a maturity mismatch, a guarantee may only be recognised as eligible CRM where the original maturity of the guarantee is greater than or equal to 12 months and the residual maturity is greater than or equal to 3 months.\n3. Where credit protection provided by a single guarantor to the same underlying exposure has different maturities, an ADI must divide the exposure into separate covered portions for risk-weighting purposes.\n4. For the purposes of determining maturity:\n 1. the effective maturity of the underlying exposure must be calculated using the longest possible remaining time before the counterparty is scheduled to fulfil its obligation; and\n 2. for the guarantee, an ADI must take into account any clause or incentive within the documentation supporting the transaction that may reduce its maturity so that the shortest possible effective maturity is used.\n5. Where there is a maturity mismatch, an ADI must apply the following adjustment:\n\n![Start formula P subscript a equals P times start fraction t minus 0.25 over T minus 0.25 end fraction end formula. ](image.011.png)\n\nwhere:\n\nPa \\= value of the guarantee adjusted for maturity mismatch\n\nP \\= guarantee amount adjusted for any haircuts (in which case, \nP \\= Ga as determined in paragraph 9 of this Attachment)\n\nt \\= min (T, residual maturity of the guarantee) expressed in years\n\nT \\= min (5, residual maturity of the exposure) expressed in years.","sortOrder":67},{"sectionNumber":"Attachment J — Credit derivatives","sectionType":"part","heading":"Attachment J — Credit derivatives","content":"## Attachment J – Credit derivatives\n\n# Purchased credit protection\n\n1. Where an ADI purchases credit protection through an eligible credit derivative, it may substitute the risk weight of the counterparty with the risk weight of the credit protection seller for the covered portion of the exposure.[\\[33\\]](#_ftn33) The uncovered portion of the exposure must be risk-weighted according to the risk weight applicable to the original counterparty.\n2. For the purposes of CRM, eligible credit derivatives are limited to:\n 1. single-name credit-default swaps; and\n 2. certain total-rate-of-return swaps.\n\nWhere an ADI purchases credit protection through a total-rate-of-return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection must not be recognised.\n\n1. Cash-funded credit linked notes issued by an ADI against exposures in the banking book that satisfy the minimum requirements for credit derivatives as detailed in this Attachment (with the exception of eligible credit protection providers set out in paragraph 12 of this Attachment) may be treated as cash-collateralised transactions under Attachment G to this Prudential Standard.\n\n1. Where an ADI buys credit protection through a credit derivative that forms part of a synthetic securitisation, the requirements detailed in APS 120 apply.\n\n### Minimum requirements\n\n1. To be recognised as eligible CRM, a credit derivative must:\n \n 1. represent a direct claim on the protection seller;\n 2. be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible;\n 3. be irrevocable, except in the case of non-payment by a protection purchaser of money due in respect of the credit protection contract. The credit derivative contract must not include any clause that would allow the protection seller to unilaterally cancel the protection of the credit derivative, or that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure;[\\[34\\]](#_ftn34)\n 4. be unconditional. The credit derivative contract must not include any clauses that are outside the direct control of the ADI, and the credit events specified in the contract must not prevent the protection seller from being obliged to pay out in a timely manner in the event that the borrower of the underlying exposure fails to make the due payment(s);\n \n 1. at a minimum, specify the following as credit events under the terms of the credit derivative contract:\n 1. the failure to pay an amount due under the terms of the underlying exposure that is in effect at the time of such failure;\n 2. the bankruptcy, insolvency or inability of the borrower of the underlying exposure to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as those debts become due, or analogous events; and\n 3. subject to paragraph 9 of this Attachment, the restructuring of the underlying exposure, including any forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. write-off, provision for a defaulted exposure or other similar debit to the profit and loss account of the ADI);\n 2. not terminate prior to the expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay; and\n \n 1. clearly identify those parties responsible for determining whether a credit event has occurred. This determination must not be the sole right of the protection seller. An ADI buying the credit protection must have the right and ability to inform the protection seller of the occurrence of a credit event.\n\n1. Where the credit derivative is based on cash settlement, the ADI must have a robust valuation process in order to reliably estimate losses on the reference obligation specified in the credit derivative contract, including a defined period for obtaining post credit event valuations of the reference obligation.\n2. Where an ADI purchases credit protection and an existing credit exposure of the ADI is the deliverable obligation under the credit derivative contract, the terms of the underlying exposure must allow for its transfer to the protection seller. If the protection purchaser's right and ability to transfer the underlying obligation to the protection provider is required for settlement, the terms of the underlying obligation must provide that any required consent to such transfer may not be unreasonably withheld.\n3. An exception to paragraph 7 of this Attachment applies where there is a restriction on the transfer of the existing credit exposure and this restriction only applies in the event of restructuring. In this case, the limit described in paragraph 9 of this Attachment applies as if restructuring of the underlying exposure was not included within the terms of the credit derivatives contract.\n\n1. If restructuring of the underlying exposure is not included within the terms of the credit derivative contract but all other requirements of paragraphs 5 to 7 of this Attachment are met, an ADI may recognise 60 per cent of the lesser of the amount of the credit protection purchased and the amount of the underlying exposure.\n2. Where there is a mismatch between the underlying obligation and the reference obligation under the credit derivative, including the obligation used for the purposes of determining the cash settlement value or the deliverable obligation, an ADI may only recognise the credit derivative as eligible CRM if the following conditions are satisfied:\n 1. the reference obligation ranks pari passu with, or is junior to the underlying obligation; and\n 2. the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.\n\n1. Where there is a mismatch between the underlying obligation and the obligation used for the purposes of determining whether a credit event has occurred, an ADI may only recognise the credit derivative as eligible CRM if the following conditions are satisfied:\n 1. the obligation used to determine whether a credit event has occurred ranks pari passu with, or is junior to, the underlying obligation; and\n 2. the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.\n\n### Eligible credit protection providers\n\n1. An ADI must only recognise credit protection provided by the following entities:\n 1. sovereigns;\n 2. banks;\n 3. other entities that are externally rated, where credit protection is provided to a non-securitisation exposure. This includes credit protection provided by parent, subsidiary and affiliate companies where they have a lower risk weight than the borrower; and\n 4. where credit protection is provided to a securitisation exposure, other entities with a credit rating grade of three or better and that were externally rated two or better at the time the credit protection was provided. This also includes credit protection provided by parent, subsidiary and affiliated companies where they have a lower risk weight than the borrower.\n\n### Materiality thresholds\n\n1. Where a credit derivative provides for a materiality threshold on payments below which no payment will be made in the event of loss, it is equivalent to a retained first loss position and must be deducted from Common Equity Tier 1 Capital in accordance with APS 111\\. This deduction will be capped at the amount of capital the ADI would be required to hold against the full value of the underlying exposure.\n\n### Proportional and tranched cover\n\n1. Where there is partial coverage of an underlying exposure by a credit derivative and the protected and unprotected portions are of equal seniority (i.e. the ADI buying credit protection and the protection seller share losses on a pro rata basis), capital relief will be afforded on a proportional basis. This means that the protected portion of the underlying exposure will receive the capital treatment applicable to eligible credit derivatives with the remainder treated as unprotected.\n2. Where there is partial coverage of an underlying exposure by a credit derivative and there is a difference in seniority between the protected and unprotected portions of the underlying exposure, then the arrangement is considered to be a synthetic securitisation and is subject to the requirements set out in APS 120.\n\n### Currency mismatch\n\n1. A currency mismatch exists where an ADI has purchased credit protection using a credit derivative and the credit derivative is denominated in a different currency from that in which the underlying exposure is denominated. In this case the amount of the exposure deemed to be protected (Ga) must be reduced by the application of a haircut (Hfx) as follows:\n\n![Start formula G subscript a equals G times open bracket 1 minus H subscript fx close bracket end formula.](image.012.png)\n\nwhere:\n\nG \\= nominal amount of the credit derivative\n\nHfx \\= haircut appropriate for the currency mismatch between the credit derivative and the underlying exposure.\n\n1. Where there is a currency mismatch, an ADI must apply a haircut of 8 per cent (based on a 10 business day holding period and daily marking-to-market). The haircut must be adjusted depending on the actual frequency of revaluation of the currency mismatch, in accordance with paragraph 32 of Attachment G to this Prudential Standard.\n\n### Maturity mismatch\n\n1. A maturity mismatch exists where the residual maturity of a credit derivative is less than the maturity of the underlying exposure.\n2. Where there is a maturity mismatch, a credit derivative may only be recognised as eligible CRM where the original maturity of the credit derivative is greater than or equal to 12 months and the residual maturity is greater than or equal to 3 months.\n3. Where credit protection provided by a single protection seller to the same underlying exposure has different maturities, an ADI must divide the exposure into separate covered portions for risk-weighting purposes.\n4. For the purpose of determining maturity:\n 1. the effective maturity of the underlying exposure must be calculated using the longest possible remaining time before the counterparty is scheduled to fulfil its obligation; and\n 2. for the credit derivative, an ADI that purchases credit protection must take into account any clause or incentive within the credit derivative contract that may reduce its maturity so that the shortest possible effective maturity is used.\n5. Where there is a maturity mismatch, an ADI must apply the following adjustment:\n\n![Start formula P subscript a equals P times start fraction t minus 0.25 over T minus 0.25 end fraction end formula.](image.013.png)\n\nwhere:\n\nPa \\= value of the amount of credit protection adjusted for maturity mismatch\n\nP \\= the amount of credit protection adjusted for any haircuts (in which case, P \\= Ga as determined in paragraph 16 of this Attachment)\n\nt \\= min (T, residual maturity of the credit derivative) expressed in years\n\nT \\= min (5, residual maturity of the underlying exposure) expressed in years.\n\n# Sold credit protection\n\n1. An ADI that sells credit protection that is not detailed in paragraphs 29 and 30 of this Attachment must, prior to execution of the relevant credit derivative contract, undertake a written assessment of the appropriate Regulatory Capital treatment for the transaction. The ADI must notify APRA prior to execution and provide its written assessment to APRA upon request. The ADI must apply the treatment set out in its written assessment unless APRA determines an alternative methodology for calculating the Regulatory Capital treatment.\n\n1. Where an ADI uses total-rate-of-return swaps to hedge a banking book credit exposure in accordance with the requirements set out in this Attachment, those transactions must be included in the ADI’s banking book. All other total-rate-of-return swaps must be included in an ADI’s trading book.\n2. Any instruments that would give rise to a net short credit or equity position in the banking book must be included in an ADI's trading book.[\\[35\\]](#_ftn35)\n3. An ADI that has sold credit protection using a credit derivative must, for capital adequacy purposes, assume that 100 per cent of the credit risk is purchased irrespective of the range of specified credit events.\n4. An ADI that sells credit protection using a credit derivative containing an embedded option to extend the term of the credit derivative must assume the longest possible effective maturity of the credit derivative. This is regardless of any contractual arrangements that may give either the protection buyer or the protection seller the incentive to reduce the contract term.\n\n1. When determining the amount of credit protection sold, an ADI must assume that any materiality thresholds included in the credit derivative contract do not reduce the acquired credit risk.\n\n### Credit-default swaps\n\n1. Where credit protection is sold via a credit-default swap referenced to a single reference entity, the ADI acquires an exposure to the credit risk of that entity. The risk weight that must be applied to the exposure is the risk weight that would otherwise apply to the reference entity. The amount of the exposure is the maximum possible amount payable under the terms of the credit derivative contract if a credit event were to occur.\n\n### First- and second-to-default basket credit derivatives\n\n1. An ADI which sells credit protection through a first-to-default or second-to-default credit derivative, must apply the following capital requirements to these exposures:\n 1. for first-to-default credit derivatives, the risk weights of the assets included in the basket must be aggregated up to a maximum of 1250 per cent and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted asset amount; and\n 2. for second-to-default credit derivatives, the treatment is similar; however, in aggregating the risk weights, the asset with the lowest risk-weighted amount can be excluded from the calculation. This treatment applies respectively for nth-to-default credit derivatives, for which the n\\-assets with the lowest risk-weighted amounts can be excluded from the calculation.","sortOrder":68},{"sectionNumber":"Purchased credit protection","sectionType":"part","heading":"Purchased credit protection","content":"# Purchased credit protection\n\n1. Where an ADI purchases credit protection through an eligible credit derivative, it may substitute the risk weight of the counterparty with the risk weight of the credit protection seller for the covered portion of the exposure.[\\[33\\]](#_ftn33) The uncovered portion of the exposure must be risk-weighted according to the risk weight applicable to the original counterparty.\n2. For the purposes of CRM, eligible credit derivatives are limited to:\n 1. single-name credit-default swaps; and\n 2. certain total-rate-of-return swaps.\n\nWhere an ADI purchases credit protection through a total-rate-of-return swap and records the net payments received on the swap as net income, but does not record offsetting deterioration in the value of the asset that is protected (either through reductions in fair value or by an addition to reserves), the credit protection must not be recognised.\n\n1. Cash-funded credit linked notes issued by an ADI against exposures in the banking book that satisfy the minimum requirements for credit derivatives as detailed in this Attachment (with the exception of eligible credit protection providers set out in paragraph 12 of this Attachment) may be treated as cash-collateralised transactions under Attachment G to this Prudential Standard.\n\n1. Where an ADI buys credit protection through a credit derivative that forms part of a synthetic securitisation, the requirements detailed in APS 120 apply.","sortOrder":69},{"sectionNumber":"Eligible credit protection providers","sectionType":"division","heading":"Eligible credit protection providers","content":"### Eligible credit protection providers\n\n1. An ADI must only recognise credit protection provided by the following entities:\n 1. sovereigns;\n 2. banks;\n 3. other entities that are externally rated, where credit protection is provided to a non-securitisation exposure. This includes credit protection provided by parent, subsidiary and affiliate companies where they have a lower risk weight than the borrower; and\n 4. where credit protection is provided to a securitisation exposure, other entities with a credit rating grade of three or better and that were externally rated two or better at the time the credit protection was provided. This also includes credit protection provided by parent, subsidiary and affiliated companies where they have a lower risk weight than the borrower.","sortOrder":71},{"sectionNumber":"Sold credit protection","sectionType":"part","heading":"Sold credit protection","content":"# Sold credit protection\n\n1. An ADI that sells credit protection that is not detailed in paragraphs 29 and 30 of this Attachment must, prior to execution of the relevant credit derivative contract, undertake a written assessment of the appropriate Regulatory Capital treatment for the transaction. The ADI must notify APRA prior to execution and provide its written assessment to APRA upon request. The ADI must apply the treatment set out in its written assessment unless APRA determines an alternative methodology for calculating the Regulatory Capital treatment.\n\n1. Where an ADI uses total-rate-of-return swaps to hedge a banking book credit exposure in accordance with the requirements set out in this Attachment, those transactions must be included in the ADI’s banking book. All other total-rate-of-return swaps must be included in an ADI’s trading book.\n2. Any instruments that would give rise to a net short credit or equity position in the banking book must be included in an ADI's trading book.[\\[35\\]](#_ftn35)\n3. An ADI that has sold credit protection using a credit derivative must, for capital adequacy purposes, assume that 100 per cent of the credit risk is purchased irrespective of the range of specified credit events.\n4. An ADI that sells credit protection using a credit derivative containing an embedded option to extend the term of the credit derivative must assume the longest possible effective maturity of the credit derivative. This is regardless of any contractual arrangements that may give either the protection buyer or the protection seller the incentive to reduce the contract term.\n\n1. When determining the amount of credit protection sold, an ADI must assume that any materiality thresholds included in the credit derivative contract do not reduce the acquired credit risk.","sortOrder":76},{"sectionNumber":"Credit-default swaps","sectionType":"division","heading":"Credit-default swaps","content":"### Credit-default swaps\n\n1. Where credit protection is sold via a credit-default swap referenced to a single reference entity, the ADI acquires an exposure to the credit risk of that entity. The risk weight that must be applied to the exposure is the risk weight that would otherwise apply to the reference entity. The amount of the exposure is the maximum possible amount payable under the terms of the credit derivative contract if a credit event were to occur.","sortOrder":77},{"sectionNumber":"First- and second-to-default basket cred","sectionType":"division","heading":"First- and second-to-default basket credit derivatives","content":"### First- and second-to-default basket credit derivatives\n\n1. An ADI which sells credit protection through a first-to-default or second-to-default credit derivative, must apply the following capital requirements to these exposures:\n 1. for first-to-default credit derivatives, the risk weights of the assets included in the basket must be aggregated up to a maximum of 1250 per cent and multiplied by the nominal amount of the protection provided by the credit derivative to obtain the risk-weighted asset amount; and\n 2. for second-to-default credit derivatives, the treatment is similar; however, in aggregating the risk weights, the asset with the lowest risk-weighted amount can be excluded from the calculation. This treatment applies respectively for nth-to-default credit derivatives, for which the n\\-assets with the lowest risk-weighted amounts can be excluded from the calculation.","sortOrder":78}],"analysis":{"flash_summary":{"complexity_score":9,"scope_assessment":{"changed":false,"description":"This version primarily recalibrates and consolidates technical rules within the standardised approach (risk weights, CRM eligibility, haircuts, EAD/CCF calculations, netting and SFT treatments) rather than expanding the universe of entities or activities regulated. It continues to target the same core population (ADIs and authorised NOHCs) and the same objective (standardised credit risk capital treatment). The instrument adds and updates specific calibrations (e.g. currency mismatch multiplier, explicit LVR bandings, supervisory haircuts, and operational tests) and contains selective grandfathering for pre‑2023 loans, but these are refinements of methodology and implementation detail rather than a material broadening of scope."},"complexity_factors":["Lengthy instrument with 10 named Attachments (A–J) containing sector‑specific rules and tables","Large number of asset classes and nested sub-classes (property: residential standard/non-standard/ADC/commercial; corporates: rated/unrated/SME/specialised lending; etc.)","Multiple calculation steps (EAD, CCFs, haircuts, margining frequency factors, maturity and currency mismatch adjustments) with mathematical formulas","Extensive tables mapping LVR bands and credit rating grades to risk weights (many multi‑cell tables)","Cross-references to other prudential standards (APS 111, APS 120, APS 180, APS 220) increasing external dependencies","Numerous eligibility, documentation and legal enforceability conditions for CRM, netting and guarantees (legal opinions, periodic reviews)","Multiple conditional exceptions and grandfathering rules (e.g. pre‑2023 loans, ADC carve‑outs)","Detailed supervisory discretion points (APRA may approve approaches, determine applicability of guarantee treatment)","Multiple rating mapping rules and due‑diligence adjustments when external ratings are used","High operational compliance burden: recurring valuation, reporting and margining frequency controls"],"plain_english_summary":"**What this instrument does (mechanically)**\n\n- APRA revokes the 2024 APS 112 determination and replaces it with a new Prudential Standard titled \"APS 112 Capital Adequacy: Standardised Approach to Credit Risk\" that applies to all ADIs (authorised deposit-taking institutions) and authorised NOHCs to the extent stated (Instrument preamble; commencement 1 July 2025).\n- The Standard prescribes how ADIs must convert on‑ and off‑balance sheet credit exposures into risk‑weighted assets (RWA) for capital adequacy purposes, including: calculation of exposure amounts (EAD), credit conversion factors (CCFs) for commitments, risk weights for asset classes (property, sovereigns, banks, corporates, retail, specialised lending, equity, etc.), defaulted exposure treatments, collateral and guarantee recognition (credit risk mitigation, CRM), haircuts and maturity/currency mismatch adjustments, and rules for netting and securitisation-related items (Attachments A–J and core text).\n\n**Who this affects**\n\n- Primary: ADIs (domestic banks, building societies, credit unions) and authorised NOHCs that are within APRA’s prudential perimeter (preamble and interpretation).\n- Indirect: counterparties to ADI lending and derivatives transactions (sovereigns, banks, corporates, SMEs, retail borrowers), guarantors and insurers (LMI providers), custodians, and market counterparties engaged in securities financing, derivatives or covered bonds.\n\n**Why it matters (practical effect)**\n\n- It determines how much regulatory capital ADIs must hold against different types of credit exposure. Higher risk weights (or higher EAD multipliers) raise capital requirements for the ADI, which in turn affects ADI pricing, underwriting standards, product availability and the allocation of balance sheet capacity.\n- The Standard sets detailed operational and documentation tests for recognising credit risk mitigation (collateral, guarantees, credit derivatives), netting and covered bond treatment — compliance affects whether ADIs can obtain capital relief and therefore their incentive to use particular mitigants.\n\n**How the rules work, in plain steps**\n\n- On‑balance exposures: RWA = current book value × applicable risk weight (plus limited adjustments for certain amortised‑cost liquid assets) (Risk‑weighted on‑balance sheet assets).\n- Off‑balance exposures: compute an on‑balance equivalent exposure (EAD) using Attachment C and APS 180 where relevant, apply CCFs (Attachment C Table 17) and then multiply by the relevant risk weight from Attachments A or B.\n- Property (Attachment A): segregates loans into standard vs non‑standard residential, commercial (dependent or not on property cash flows) and ADC (land acquisition, development, construction). Risk weights vary by LVR bands, loan type (owner‑occupied v investment), presence of LMI, and other criteria (tables in Attachment A).\n- Credit risk mitigation (CRM): ADIs may split exposures into portions covered by different CRM techniques and must satisfy enforceability, documentation and eligibility tests before receiving capital relief (CRM, Attachments G, I, J).\n- Collateral approaches: ADIs choose either the simple or comprehensive approach for received collateral; each has eligibility lists, haircut tables and maturity/currency mismatch adjustments (Attachment G).\n- Ratings and external credit assessment (ECAI): where risk weights rely on external ratings, mapping rules, due‑diligence requirements and restrictions (no ratings that assume implicit government support) apply (Attachment F).\n- Specific treatments: netting rules (Attachment H), treatment of unsettled/failed transactions (Attachment D with escalating risk weights by days overdue), SFTs and covered bonds (Attachments G and B), and defaulted exposures (Attachment E with separate defaulted tables).\n\n**Stated purpose-claims and practical tests against costs & incentives**\n\n- Stated purpose (from structure): the Standard implements a calibrated standardised approach so capital requirements reflect credit quality, collateral and exposure type. APRA’s calibration appears intended to differentiate risk across asset classes and to ensure enforceability before capital relief is given (see Attachments A, B, F, G, I, J).\n\n- Costs and incentives: the Standard increases operational, legal and compliance tasks for ADIs because recognition of CRM, netting and specialised treatments requires legal opinions, documentation, periodic review and data (Attachments G, H, I). Those are direct costs to ADIs (time, systems, legal fees). Where the Standard assigns higher risk weights or multipliers (e.g. ADC default 150% weight; currency‑mismatch multiplier 1.5× for unhedged post‑2023 foreign‑income lending), ADIs face higher capital costs and therefore an incentive to raise prices, reduce exposure, ring‑fence certain business lines, or seek eligible mitigants (Attachments A; Risk weight multiplier paragraph).\n\n- Trade‑offs and potential substitution effects: ADIs may substitute towards exposures that attract lower risk weights (sovereigns, highly rated banks, owner‑occupied lower‑LVR mortgages with LMI) or increase use of recognised CRM (eligible guarantees, collateral) — subject to the documentation and enforceability tests. There is scope for concentration if many ADIs shift similarly (e.g. preference for lower‑LVR owner‑occupied mortgages), and for operational burden if ADIs pursue complex collateral structures to reduce capital needs.\n\n**Who pays, who decides, likely behaviour changes**\n\n- Who pays: ADIs pay the direct compliance and capital costs; economic incidence may fall on borrowers (through higher lending rates or tighter lending standards), guarantors/insurers (demand for eligible guarantees), and counterparties (e.g. corporations facing stricter credit terms).\n- Who decides: APRA sets the rules and discretionary approvals (e.g. approval for comprehensive approach, acceptance of netting/legal opinions, APRA determination on government guarantee treatments). ADI boards and risk/compliance teams decide internal policies, whether to use particular CRM approaches, and underwriting changes (attachments G, H, I; APRA discretion noted in several places).\n- Behaviour changes expected: ADIs will adjust lending appetite by LVR, collateral type and currency exposure; invest in legal and valuation capacity to meet enforceability and valuation rules; consider hedging/currency arrangements to avoid the 1.5× multiplier; and potentially reprice or reduce certain lines (e.g. ADC, unrated corporates, non‑standard residential loans).\n\n**Implementation risks & compliance burden**\n\n- Major implementation tasks include: mapping internal book to the specified asset classes and LVR bands; obtaining external credit ratings or doing due diligence where ratings are used; legal opinions for netting and CRM enforceability; periodic asset valuations and margining controls; and enhanced reporting. These are recurring and may require new systems and staff (Attachments F, G, H).\n\n**Selected concrete provisions to note (examples and references)**\n\n- Effective date and revocation: Commences 1 July 2025; replaces Banking (prudential standard) determination No. 1 of 2024 (preamble).\n- Currency mismatch multiplier: 1.5× applied to risk weights for unhedged retail or residential exposures where loan currency ≠ borrower income currency for exposures originated after 1 Jan 2023 (Risk weight multiplier paragraph).\n- Grandfathering: property exposures originated before 1 Jan 2023 with no material change need not satisfy newer serviceability criteria to be classified as ‘standard’ (Attachment A, paragraph on origination date).\n- Home Guarantee Scheme: eligible loans with an NHFIC guarantee may attract a 35% risk weight subject to certificate and APRA or scheme expiry (Attachment A table footnotes).\n- Unsettled/failed transactions: escalating risk weights for DvP transactions that remain unsettled (100% then 625% then up to 1250% depending on days overdue) (Attachment D).\n\n(References in parentheses refer to the attachment or paragraph headings in the instrument.)"},"kimi_summary":{"_metrics":{"completionTokens":1013},"content_quality":"ok","complexity_score":9,"scope_assessment":{"changed":false,"description":"This is a technical update/revocation and replacement of a 2024 determination. The scope remains consistent with the original intent: setting capital adequacy requirements for credit risk under the standardised approach. No material expansion beyond the original prudential purpose."},"complexity_factors":["Multiple nested attachments (A through J) with cross-referencing requirements","Extensive use of defined terms requiring lookup in the Banking Act or other prudential standards","Numerous conditional tables with multiple dimensions (e.g. LVR bands × loan type × LMI status × standard/non-standard)","Mathematical formulas for collateral adjustments, maturity mismatches, and netting calculations","Extensive cross-references to other prudential standards (APS 111, APS 120, APS 180, APS 220)","Layered exceptions and special cases (e.g. pre-2023 loans, Home Guarantee Scheme, reverse mortgages)","Currency mismatch and maturity mismatch adjustment calculations with multiple variables","Requirements for legal opinions and enforceability assessments across multiple jurisdictions","Footnote references to undefined external documents","Duplicated content in the source text (e.g. 'Purchased credit protection' section appears twice verbatim)"],"plain_english_summary":"This APRA prudential standard sets the standardised method for calculating risk‑weighted assets for credit risk, determining how much regulatory capital Australian banks (ADIs) and authorised NOHCs must hold. \n\nIt covers property and non‑property exposures, credit risk mitigation, off‑balance commitments and defaulted loans. By translating Basel III rules into risk weights, it shapes capital costs and lending incentives—safer loans attract lower capital, influencing banks’ portfolios and protecting depositors and financial stability."},"flash_summary_failed":{"failed":true,"reason":"A positive credit balance is required for all requests, including BYOK, so fallback providers remain available. Add credits at https://vercel.com/d?to=%2F%5Bteam%5D%2F%7E%2Fai%3Fmodal%3Dtop-up to continue.","source":"analysis-cron"}},"importantCases":[],"_links":{"self":"/api/acts/banking-prudential-standard-determination-no-2-of-2025","history":"/api/acts/banking-prudential-standard-determination-no-2-of-2025/history","analysis":"/api/acts/banking-prudential-standard-determination-no-2-of-2025/analysis","conflicts":"/api/acts/banking-prudential-standard-determination-no-2-of-2025/conflicts","importantCases":"/api/acts/banking-prudential-standard-determination-no-2-of-2025/important-cases","documents":"/api/acts/banking-prudential-standard-determination-no-2-of-2025/documents"}}