Banking (prudential standard) determination No. 2 of 2025
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This APRA instrument revokes the 2024 determination and, from 1 July 2025, establishes Prudential Standard APS 112. It prescribes the exact mechanics ADIs and authorised NOHCs must use to calculate credit risk RWA — including on‑ and off‑balance exposures, property and non‑property risk weights, collateral/CRM, netting, guarantees and credit‑derivative treatments.
The standard makes ADIs responsible for valuation, legal enforceability and operational controls, while APRA retains approval rights for certain treatments (e.g. guarantees or methodologies); firms therefore face modelling, documentation and compliance burdens.
This instrument, Banking (prudential standard) determination No. 2 of 2025, determines Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk (APS 112) and revokes the prior determination No. 1 of 2024 (the earlier APS 112). It is made by an APRA delegate under subsection 11AF(1) and revocation under subsection 11AF(3) of the Banking Act 1959, dated 13 April 2025, and commences on 1 July 2025. The determination, in the form set out in the schedule, applies to all authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised NOHCs), subject to any limits stated in the prudential standard itself (see the instrument preamble referencing subsection 11AF and the application to ADIs and authorised NOHCs).
Mechanically, APS 112 specifies how ADIs must measure credit risk for regulatory capital purposes under the standardised approach. Core mechanics prescribed include:
Calculation of risk-weighted assets (RWA) for on-balance sheet exposures by multiplying the current book value (including accrued interest and revaluations, net of provisions and write-offs) by the applicable risk weight, with a limited adjustment for certain liquid assets at amortised cost (see "Risk-weighted on-balance sheet assets", para 1).
A two-step method for off-balance sheet non-SFT exposures: first convert to an exposure at default (EAD) using Attachment C or APS 180 where applicable; then apply the counterparty/exposure-type risk weight to the EAD ("Risk-weighted off-balance sheet exposures", paras 1.1-1.2).
Treatment of securities financing transactions (SFTs), where EAD is calculated under Attachment G and both the counterparty exposure and any residual credit/market risk in lent/posting securities are captured ("Risk-weighted off-balance sheet exposures", para 2).
Current sections
Direct links to the current provisions in Banking (prudential standard) determination No. 2 of 2025.
Banking (prudential standard) determination No. 2 of 2025
Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk
Banking Act 1959
I, Sean Carmody, a delegate of APRA:
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
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.
This instrument commences on 1 July 2025.
Dated: 13 April 2025
Sean Carmody
Executive Director
Policy and Advice Division
Interpretation
In this instrument:
APRA means the Australian Prudential Regulation Authority.
ADI, authorised NOHC and prudential standard have their respective meanings given in subsection 5(1) of the Act.
Schedule
Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk comprises the document commencing on the following page.
In this instrument:
In this instrument:
In this instrument:
APRA means the Australian Prudential Regulation Authority.
ADI, authorised NOHC and prudential standard have their respective meanings given in subsection 5(1) of the Act.
Schedule
Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk comprises the document commencing on the following page.
Risk-weighted on-balance sheet assets
Risk-weighted on-balance sheet assets
Risk-weighted on-balance sheet assets
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] 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.
Risk-weighted off-balance sheet exposure
Risk-weighted off-balance sheet exposures
Risk-weighted off-balance sheet exposures
The RWA of a non-SFT off-balance sheet exposure must be calculated by applying the following two-step process:
first, the exposure amount or exposure at default (EAD), representing the on-balance sheet equivalent amount, must be determined according to:
Attachment C to this Prudential Standard for any commitments; and
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;
second, the resulting exposure amount or EAD must be multiplied by the relevant risk weight applicable to the counterparty or exposure type.
For SFTs, including securities lending transactions, an ADI must calculate:
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
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.
Credit risk mitigation
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.
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.
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).
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.
Attachment A — Risk weights for property
Attachment A — Risk weights for property exposures
Attachment A – Risk weights for property exposures
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.
Standard property loans
Standard property loans
Standard property loans
A loan must meet all of the requirements set out in paragraphs 3 to 7 of this Attachment to be classified as standard.
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.
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:
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;
the ADI must ensure that the amount secured by the first mortgage cannot be increased without being subordinate to the second mortgage;
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
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).
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:
consideration of the impact of higher interest rates on the ability of the borrower to repay;
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;
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
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.
Where 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.
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.
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.
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.
Loan-to-valuation ratio
Loan-to-valuation ratio
Loan-to-valuation ratio
The components of LVR must be prudently calculated in accordance with the requirements set out in paragraphs 10 and 11 of this Attachment.
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:
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
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.
When calculating LVR, the loan amount will reduce if the loan amortises.
The value of the property must be appraised independently using prudently conservative criteria, consistent with the requirements set out in APS 220.[5] If a market value can be determined, the valuation must not be higher than the market value.[6] For the purpose of calculating the property value:
the value of the property at origination must be maintained, unless:
an updated valuation is obtained as part of a new loan application process in relation to the mortgaged property;
an event occurs that results in a likely permanent reduction in the property’s value; or
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;
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
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.
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.
Credit risk mitigation
Credit risk mitigation
Credit risk mitigation
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.
Residential property
Residential property
Residential property
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:
‘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:
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
a part-time residence that is the principal place of residence of the borrower(s).
Where 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.
‘Principal-and-interest’ refers to a loan on which interest is paid and principal is automatically amortised over the life of the loan.
‘Other standard residential property’ refers to any of the following exposures:
loans for a purpose other than owner-occupation, including for investment or business purposes;
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
other loans that do not meet both of the criteria in paragraphs 14(a) and 14(b) of this Attachment.
Lenders’ mortgage insurance
Lenders’ mortgage insurance
Lenders’ mortgage insurance
An ADI may reduce its capital requirement through the application of LMI, where the insurance:
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
is provided by an eligible lenders’ mortgage insurer, which means that:
for the purposes of Level 1 Regulatory Capital, the lenders’ mortgage insurer must be regulated by APRA; and
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.
Risk weights for standard residential pr
Risk weights for standard residential property loans
Risk weights for standard residential property loans
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.
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:
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
APRA determines that it no longer applies.
APRA 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.
Risk weights for non-standard residentia
Risk weights for non-standard residential property loans
Risk weights for non-standard residential property loans
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.
The following exposures must also be classified as non-standard loans:
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;
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;
shared equity mortgages, where both the borrower and lender share in any gain or loss in the value of the mortgaged property; and
loans to self-managed superannuation funds.
An ADI must apply the risk weights in Table 2 to its non-standard loans secured by residential property, based on LVR (where applicable).
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.
Commercial property
Commercial property
Commercial property
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.
Dependent on property cash flows
Dependent on property cash flows
Dependent on property cash flows
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.
Risk weights for commercial property exposures – dependent on property cash flows
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.
Risk weights for commercial property exposures – not dependent on property cash flows
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:
the borrower is a corporate entity that is managed by a recognised, professional and reputable management team;
the ADI’s exposure to the borrower is not specifically or substantially financing limited recourse development projects;
the borrower has greater than $250 million in tangible assets, to which the ADI has unconditional recourse;
real estate assets are sufficiently diversified such that:
no single asset represents greater than 25 per cent of the borrower’s real estate portfolio by value; and
real estate assets are not concentrated in one particular specific geographic location; and
for real estate operators or investors, tenants are sufficiently diversified such that no single tenant represents:
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
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.
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).
Land acquisition, development and constr
Land acquisition, development and construction
Land acquisition, development and construction
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.
All property exposures where the predominant property security is not fully completed must be included as ADC unless:
the property is used predominantly for forest or agricultural purposes; or
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.
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:
the exposure meets all of the requirements in paragraphs 3, 4, 6 and 7 of this Attachment;
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;
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
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.
An ADI must apply a risk weight of 150 per cent to all other ADC exposures.
Attachment B — Risk weights for non-prop
Attachment B — Risk weights for non-property exposures
Attachment B – Risk weights for non-property exposures
An ADI must risk-weight all exposures that are not property exposures according to the requirements detailed in this Attachment, with the exception of:
unsettled and failed transactions, which must be risk-weighted in accordance with Attachment D to this Prudential Standard; and
defaulted exposures, which must be risk-weighted in accordance with Attachment E to this Prudential Standard.
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.
Sovereign exposures
Sovereign exposures
Sovereign exposures
A sovereign exposure includes:
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;
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
all exposures to institutions and multilateral development banks eligible for a zero per cent risk weight.[7]
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.
Risk weights for sovereign exposures
Credit rating grade
1
2
3
4, 5
6
Unrated
Risk weight (%)
0
20
50
100
150
100
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.
Domestic public sector entities
Domestic public sector entities
Domestic public sector entities
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.
Risk weights for domestic PSEs
Credit rating grade
1
2
3
4, 5
6
Unrated
Risk weight (%)
20
50
50
100
150
50
Bank exposures
Bank exposures
Bank exposures
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.
An ADI must apply the risk weights in Table 7 to its bank exposures, based on the external credit rating of the bank.
Risk weights for bank exposures
Credit rating grade (long-term)
1
2
3
4, 5
6
Unrated
Risk weight (%)(short-term exposure)
20
20
20
50
150
20
Risk weight (%)(long-term exposure)
20
30
50
100
150
50
For the purpose of Table 7, an ADI may apply the short-term exposure risk weights to its bank exposures, where the exposure:
has an original maturity of three months or less; or
arises from the movement of goods across national borders, with an original maturity of six months or less.[8]
Unrated bank exposures must be risk-weighted as the higher of:
20 per cent for short-term exposures and 50 per cent for long-term exposures; and
the risk weight applicable to exposures to the sovereign of the country where the bank counterparty is incorporated.
The sovereign risk-weight floor does not apply to short-term self-liquidating, trade-related contingent items that arise from the movement of goods.[9]
An ADI must apply the risk weights in Table 8 to short-term bank exposures with an issue-specific external credit rating.
Risk weights for bank exposures (short-term issue-specific credit ratings)
Credit rating grade (short term)
1
2
3
4
Risk weight (%)
20
50
100
150
If an ADI has a bank exposure with an issue-specific short-term external credit rating that maps to a credit rating grade:
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;
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
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.
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.
Covered bonds
Covered bonds
Covered bonds
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.
Risk weights for rated covered bond exposures
Credit rating grade
1
2, 3
4, 5
6
Risk weight (%)
10
20
50
100
An ADI may apply the risk weights in Table 9 where:
the cover pool includes only the following assets:
loans to, or guaranteed by, sovereigns or domestic PSEs;
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;
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
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;
the nominal value of the cover pool exceeds the nominal outstanding value of the covered bond by at least 10 per cent; and
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.
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:
the value of the cover pool and outstanding covered bonds;
the geographical distribution and type of cover assets, loan size, interest rate and currency risks;
the maturity structure of assets in the cover pool and of the covered bonds; and
the percentage of loans that are 90 days or more past-due.
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.
Corporate exposures
Corporate exposures
Corporate exposures
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.
General corporate — rated exposures
General corporate — rated exposures
General corporate – rated exposures
An ADI must apply the risk weights in Table 10 to its general corporate exposures with an external credit rating.
Risk weights for general corporate exposures
Credit rating grade (long-term)
1
2
3
4
5, 6
Risk weight (%)
20
50
75
100
150
An ADI must apply the risk weights in Table 11 to short-term general corporate exposures with an issue-specific external credit rating.
Risk weights for general corporate exposures (short-term issue-specific credit ratings)
Credit rating grade (short-term)
1
2
3
4
Risk weight (%)
20
50
100
150
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.
General corporate — unrated small- and m
General corporate — unrated small- and medium-sized enterprise exposures
General corporate – unrated small- and medium-sized enterprise exposures
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.
An ADI must apply the risk weights in Table 12 to its unrated SME exposures.
Risk weights for unrated SME exposures
Risk weight (%)
SME retail
75
SME corporate
85
To be risk-weighted as SME retail, the following criteria must be satisfied:
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
the maximum aggregated exposure to the SME counterparty is less than $1.5 million. For this purpose:
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
the SME counterparty means either a single SME, or where the SME forms part of a corporate group, the broader group.
General corporate — other
General corporate — other
General corporate – other
For all other unrated general corporate exposures that are not treated as SME, an ADI must either:
assign a 100 per cent risk-weight to all exposures; or
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.
An 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.
Specialised lending
Specialised lending
Specialised lending
A corporate exposure must be classified as a specialised lending exposure if it possesses the following characteristics, either in legal form or economic substance:
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;
the exposure is typically to an entity that was created specifically to finance or operate physical assets;
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;
the terms of the obligation give the ADI a substantial degree of control over the assets and the income that it generates; and
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.
The specialised lending asset class includes the following three sub-classes:
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;
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
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.
Where an issue-specific external credit rating is available for a specialised lending exposure, an ADI must apply the risk weights in Table 10.
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.
Risk weights for unrated specialised lending exposures
Risk weight (%)
Project finance
110
Object and commodities finance
100
Retail exposures
Retail exposures
Retail exposures
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.
An ADI must apply the risk weights in Table 14 to its retail exposures, based on the product type.
Risk weights for retail exposures
Risk weight (%)
Credit card exposures
75
Other retail exposures
100
Margin lending exposures
Margin lending exposures
Margin lending exposures
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.
Subordinated debt
Subordinated debt
Subordinated debt
Subordinated debt includes any facility that is expressly subordinated to another facility, or has the effect of conveying economic subordination to another facility.[10] Subordinated debt that is not required to be deducted from regulatory capital under APS 111 must be risk weighted at 150 per cent.
Equity
Equity
Equity
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] 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:
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;
it does not embody an obligation of the issuer; and
it conveys a residual claim on the assets or income of the issuer.
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.
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.
Instruments with a return directly linked to equities must be treated as equity exposures.
An ADI must risk-weight equity exposures that are not required to be deducted from Regulatory Capital under APS 111 at:
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] and
400 per cent if the equity exposure is not listed on a recognised exchange.
Leases
Leases
Leases
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.
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.
Risk weights for residual value under lease exposures
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
Exposures to residual value
100
250
Exposures through a third party
Exposures through a third party
Exposures through a third party
An ADI must apply a risk weight of 150 per cent to credit exposures originated through a third party, where the ADI:
does not undertake the credit assessment and approval of the underlying borrower under its own credit risk policies and processes;
is unable to administer the workout or default processes; and
does not have direct recourse to the third party or underlying borrower in the event of default.
The risk weight prescribed in this paragraph must be applied to all such arrangements irrespective of the characterisation of the third party or underlying borrower.
Other exposures
Other exposures
Other exposures
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.
Risk weights for other exposures
Risk weight (%)
Cash owned and held at the ADI or in transit
0
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
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
Investments in premises, plant and equipment, and all other fixed assets
100
All other exposures not specified elsewhere
100
Risk weight multiplier for certain expos
Risk weight multiplier for certain exposures with currency mismatch
Risk weight multiplier for certain exposures with currency mismatch
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.
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.
Attachment C — Off-balance sheet commitm
Attachment C — Off-balance sheet commitments
Attachment C – Off-balance sheet commitments
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.
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.
Where an ADI enters into an arrangement that meets all of the following conditions, it may be excluded from the definition of commitment:
the ADI receives no fees or commissions to establish or maintain the arrangement;[13]
the borrower is required to apply to the ADI for the initial and each subsequent drawdown;
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]
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] and
the borrower is a corporate counterparty that is closely monitored on an ongoing basis, and is not an SME retail borrower.
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.
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.
CCFs
Transaction type
CCF (%)
Direct credit substitutes
100
Sale and repurchase agreements and asset sales with recourse[16]
100
Lending of securities or posting of securities as collateral
100
Forward asset purchases, forward deposits and partly paid shares and securities[17]
100
Other off-balance sheet items that are credit substitutes
100
Unsettled securities, commodities and foreign exchange transactions accounted for at settlement date
100
Other commitments with certain drawdown
100
Note issuance and revolving underwriting facilities
50
Performance-related contingencies
50
Other commitments
40
Short-term self-liquidating trade letters of credit arising from the movement of goods[18]
20
Intraday limits
0
Irrevocable standby commitments under industry support arrangements
0
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.
Attachment D — Unsettled and failed tran
Attachment D — Unsettled and failed transactions
Attachment D – Unsettled and failed transactions
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.
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.
Risk weights for DvP transactions
Number of business days after settlement date
Risk weight (%)
5 to 15
100
16 to 30
625
31 to 45
937.5
46 or more
1250
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:
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
in the case of a cross-border transaction, one day or more has elapsed since it made that payment or delivery.
An ADI must calculate the capital requirement for a non-DvP transaction as follows:
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
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.
Where a non-DvP transaction must be treated as an exposure in accordance with paragraph 4(a) of this Attachment, an ADI may:
apply the relevant risk weight based on the counterparty as detailed in Attachment B to this Prudential Standard; or
where exposures are not material, apply a 100 per cent risk weight provided that all such exposures are risk-weighted consistently.
Attachment E — Defaulted exposures
Attachment E — Defaulted exposures
Attachment E – Defaulted exposures
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.
An ADI may recognise eligible credit risk mitigation in calculating the exposure amount.
Risk weights for residential property ex
Risk weights for residential property exposures
Risk weights for residential property exposures
An ADI must apply the risk weights in Table 19 to its defaulted residential property exposures.
Risk weights for defaulted residential property exposures
Risk weight (%)
Owner-occupied principal-and-interest with LMI
80
Owner-occupied principal-and-interest without LMI
100
Other standard residential property with LMI
95
Other standard residential property without LMI
120
Non-standard loans
150
Risk weights for other defaulted exposur
Risk weights for other defaulted exposures
Risk weights for other defaulted exposures
An ADI must apply the risk weights in Table 20 to its defaulted exposures that are not residential property exposures.
Risk weights for other defaulted exposures
Risk weight (%)
Provisions for the defaulted exposure are ≥ 20 per cent of the outstanding exposure amount
100
Provisions for the defaulted exposure are < 20 per cent of the outstanding exposure amount
150
Attachment F — External credit ratings
Attachment F — External credit ratings
Attachment F – External credit ratings
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] Ratings must be used consistently for each type of exposure.
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.
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.
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.
Issue-specific and issuer ratings
Issue-specific and issuer ratings
Issue-specific and issuer ratings
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:
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;
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
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.
Multiple assessments
Multiple assessments
Multiple assessments
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:
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
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.
Domestic and foreign currency exposures
Domestic and foreign currency exposures
Domestic and foreign currency exposures
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.
Mapping of credit rating grades
Mapping of credit rating grades
Mapping of credit rating grades
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.
Recognised long-term ratings and equivalent credit rating grades
Credit rating grade
S&P Global Ratings
Moody’s
Fitch Ratings
1
AAAAA+AAAA-
AaaAa1Aa2Aa3
AAAAA+AAAA-
2
A+AA-
A1A2A3
A+AA-
3
BBB+BBBBBB-
Baa1Baa2Baa3
BBB+BBBBBB-
4
BB+BBBB-
Ba1Ba2Ba3
BB+BBBB-
5
B+BB-
B1B2B3
B+BB-
6
CCC+CCCCCC-CCCD
Caa1Caa2Caa3CaC
CCC+CCCCCC-CCCD
Recognised short-term ratings and equivalent credit rating grades
Credit rating grade
S&P Global Ratings
Moody’s
Fitch Ratings
1
A-1
P-1
F-1
2
A-2
P-2
F-2
3
A-3
P-3
F-3
4
Others
Others
Others
Attachment G — Collateralised transactio
Attachment G — Collateralised transactions
Attachment G – Collateralised transactions
This Attachment specifies how an ADI:
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
must determine the EAD for SFTs or, for ADIs that use the simple approach, the risk weights.
In this Attachment:
‘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
‘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.
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.
For trading book exposures, an ADI must use the comprehensive approach where it has received collateral from the counterparty.
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.
Minimum conditions for collateralised tr
Minimum conditions for collateralised transactions
Minimum conditions for collateralised transactions
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.
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.
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.
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.
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.
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).
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:
the risk to which margin agreements expose it, such as the volatility and liquidity of the securities exchanged as collateral;
the concentration risk to particular types of collateral;
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
the surrender of rights on collateral posted to counterparties.
The simple approach
The simple approach
The simple approach
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.
Eligible financial collateral under the
Eligible financial collateral under the simple approach
Eligible financial collateral under the simple approach
An ADI using the simple approach may only recognise the following items as eligible financial collateral:
cash collateral (cash, certificates of deposit and bank bills issued by the ADI) on deposit with the ADI;[20]
gold bullion;
debt securities rated by an ECAI that have a credit rating grade of either:
four (or better) for long-term securities issued by sovereigns;[21] or
three (or better) for short-term or long-term securities issued by other counterparties;
debt securities not rated by an ECAI where:
the securities are issued by a bank as senior debt and are listed on a recognised exchange;
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
the ADI holding the security has no information suggesting that the security justifies a rating below this level;
senior securitisation exposures, as defined in APS 120, with an external credit rating grade of one;
units in a listed or unlisted trust where:
the unit price of the trust is publicly quoted on a daily basis;
the trust is limited to investing in the instruments detailed in paragraphs 14(a) to 14(e) of this Attachment;[22] and
for unlisted trusts, the ADI can redeem its investment within three business days.
Resecuritisation exposures, as defined in APS 120, are not eligible financial collateral.
Risk weights under the simple approach
Risk weights under the simple approach
Risk weights under the simple approach
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.
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.
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:
the collateral is cash on deposit as defined in paragraph 14(a) of this Attachment; or
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.
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:
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;
both the exposure and the collateral are denominated in the same currency;
either the transaction is overnight, or both the exposure and the collateral are marked-to-market daily and are subject to daily remargining;
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;
the transaction is settled across an established settlement system for that type of transaction;
the documentation for the transaction is standard market documentation;
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
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.
The following entities are core market participants:
the Australian Government and the Reserve Bank of Australia;
sovereigns that qualify for a zero per cent risk weight in accordance with Attachment B to this Prudential Standard;
banks;
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
qualifying central counterparties, as defined in APS 180.
The comprehensive approach
The comprehensive approach
The comprehensive approach
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.
Calculation of Regulatory Capital for co
Calculation of Regulatory Capital for collateralised transactions
Calculation of Regulatory Capital for collateralised transactions
For a collateralised transaction under the comprehensive approach, including SFTs, an ADI must adjust EAD as follows:
Hj 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
Ci 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
Hi is the haircut appropriate to the i-th item of received collateral under the transaction, calculated in accordance with paragraph 28 of this Attachment
Hfx,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
A is the margining frequency adjustment factor determined in accordance with paragraph 32 of this Attachment.
Collateral maturity mismatch
Collateral maturity mismatch
Collateral maturity mismatch
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.
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.
For the purpose of determining maturity:
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
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.
Where there is a maturity mismatch, an ADI must apply the following adjustment:
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.
Adjustments for different holding period
Adjustments for different holding periods and non-daily mark-to-market or remargining
Adjustments for different holding periods and non-daily mark-to-market or remargining
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.
Minimum holding periods and conditions
Transaction type
Minimum holding period (business days)
Condition
SFTs
5
Daily remargining
Other capital market transactions
10
Daily remargining
Secured lending
20
Daily revaluation
Under the following circumstances, an ADI must apply a higher minimum holding period:
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;
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
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.
In 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.
An ADI must calculate the margining frequency adjustment factor for a transaction or netting set as:
TM is the minimum holding period for the type of transaction determined in accordance with paragraphs 30 to 31 of this Attachment
NR is the number of business days between remarginings or revaluations.
Treatment of SFTs covered by master nett
Treatment of SFTs covered by master netting agreements
Treatment of SFTs covered by master netting agreements
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:
Es is the net current value of each security issuance under the netting set (always a positive value)
Hs 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 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)
Efx is the absolute value of the net position in each currency fx different from the settlement currency
Hfx is the haircut appropriate for currency mismatch of currency fx.
Attachment H — Netting
Attachment H — Netting
Attachment H – Netting
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.
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.
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:
monitoring and reporting netted transactions on a gross and net basis; and
monitoring and managing roll-off risk and termination risk.
An ADI must maintain adequate records to support the application of the netting agreement.
Use of netting
Use of netting
Use of netting
For Regulatory Capital purposes, an ADI may only net the following types of transactions:
on-balance sheet loans and deposits;
SFTs; and
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.
An ADI may only net internal transactions between the banking book and trading book if:
the netted transactions are marked-to-market daily, where applicable;[28] and
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.
On-balance sheet netting
On-balance sheet netting
On-balance sheet netting
An ADI may only use the net exposures of loans and deposits as the basis for its RWA calculation where it:
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;
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;
monitors and controls its roll-off risks; and
monitors and controls the exposures on a net basis.
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.
Eligible bilateral netting agreement
Eligible bilateral netting agreement
Eligible bilateral netting agreement
An eligible bilateral netting agreement, which includes a master netting agreement, is a netting agreement with a counterparty which:
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]
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]
allows for the prompt liquidation or set-off of collateral upon the event of default;
is legally enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt; and
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).
Legal enforceability
Legal enforceability
Legal enforceability
To ensure the legal enforceability of a netting agreement, an ADI must:
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:
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;
the law that governs the individual transactions involved; and
the law that governs any contract or agreement necessary to give effect to the netting; and
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.
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.
Attachment I — Guarantees
Attachment I — Guarantees
Attachment I – Guarantees
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] The uncovered portion of the exposure must be risk-weighted according to the risk weight applicable to the original counterparty.
Minimum requirements
Minimum requirements
Minimum requirements
To be recognised as eligible CRM, a guarantee must:
represent a direct claim on an eligible guarantor;
be an explicitly documented obligation assumed by the guarantor;
be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible;
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]
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;
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
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.
Eligible guarantors
Eligible guarantors
Eligible guarantors
An ADI must only recognise guarantees provided by the following entities when they have a lower risk weight than the counterparty:
sovereigns;
banks;
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
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.
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:
the indirect guarantee covers all credit risk elements of the claim;
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
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.
Letters of comfort do not qualify as eligible guarantees for CRM purposes.
Materiality thresholds
Materiality thresholds
Materiality thresholds
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.
Proportional and tranched cover
Proportional and tranched cover
Proportional and tranched cover
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.
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.
Currency mismatch
Currency mismatch
Currency mismatch
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:
haircut appropriate for the currency mismatch between the guarantee and the underlying exposure.
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.
Maturity mismatch
Maturity mismatch
Maturity mismatch
A maturity mismatch exists where the residual maturity of a guarantee is less than the maturity of the exposure covered by the guarantee.
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.
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.
For the purposes of determining maturity:
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
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.
Where there is a maturity mismatch, an ADI must apply the following adjustment:
Pa = value of the guarantee adjusted for maturity mismatch
P = guarantee amount adjusted for any haircuts (in which case,
P = Ga as determined in paragraph 9 of this Attachment)
t = min (T, residual maturity of the guarantee) expressed in years
T = min (5, residual maturity of the exposure) expressed in years.
Attachment J — Credit derivatives
Attachment J — Credit derivatives
Attachment J – Credit derivatives
Purchased credit protection
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] The uncovered portion of the exposure must be risk-weighted according to the risk weight applicable to the original counterparty.
For the purposes of CRM, eligible credit derivatives are limited to:
single-name credit-default swaps; and
certain total-rate-of-return swaps.
Where 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.
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.
Where an ADI buys credit protection through a credit derivative that forms part of a synthetic securitisation, the requirements detailed in APS 120 apply.
Minimum requirements
To be recognised as eligible CRM, a credit derivative must:
represent a direct claim on the protection seller;
be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible;
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]
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);
at a minimum, specify the following as credit events under the terms of the credit derivative contract:
the failure to pay an amount due under the terms of the underlying exposure that is in effect at the time of such failure;
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
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);
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
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.
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.
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.
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.
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.
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:
the reference obligation ranks pari passu with, or is junior to the underlying obligation; and
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.
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:
the obligation used to determine whether a credit event has occurred ranks pari passu with, or is junior to, the underlying obligation; and
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.
Eligible credit protection providers
An ADI must only recognise credit protection provided by the following entities:
sovereigns;
banks;
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
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.
Materiality thresholds
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.
Proportional and tranched cover
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.
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.
Currency mismatch
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:
Hfx = haircut appropriate for the currency mismatch between the credit derivative and the underlying exposure.
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.
Maturity mismatch
A maturity mismatch exists where the residual maturity of a credit derivative is less than the maturity of the underlying exposure.
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.
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.
For the purpose of determining maturity:
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
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.
Where there is a maturity mismatch, an ADI must apply the following adjustment:
Pa = value of the amount of credit protection adjusted for maturity mismatch
P = the amount of credit protection adjusted for any haircuts (in which case, P = Ga as determined in paragraph 16 of this Attachment)
t = min (T, residual maturity of the credit derivative) expressed in years
T = min (5, residual maturity of the underlying exposure) expressed in years.
Sold credit protection
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.
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.
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]
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.
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.
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.
Credit-default swaps
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.
First- and second-to-default basket credit derivatives
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:
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
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.
Purchased credit protection
Purchased credit protection
Purchased credit protection
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] The uncovered portion of the exposure must be risk-weighted according to the risk weight applicable to the original counterparty.
For the purposes of CRM, eligible credit derivatives are limited to:
single-name credit-default swaps; and
certain total-rate-of-return swaps.
Where 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.
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.
Where an ADI buys credit protection through a credit derivative that forms part of a synthetic securitisation, the requirements detailed in APS 120 apply.
Eligible credit protection providers
Eligible credit protection providers
Eligible credit protection providers
An ADI must only recognise credit protection provided by the following entities:
sovereigns;
banks;
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
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.
Sold credit protection
Sold credit protection
Sold credit protection
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.
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.
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]
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.
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.
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.
Credit-default swaps
Credit-default swaps
Credit-default swaps
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.
First- and second-to-default basket cred
First- and second-to-default basket credit derivatives
First- and second-to-default basket credit derivatives
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:
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
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.
Source text: opening excerpt
Sourced from the Federal Register of Legislation (legislation.gov.au), CC BY 4.0.
Interpretation Interpretation
Banking (prudential standard) determination No. 2 of 2025
Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk
Banking Act 1959
I, Sean Carmody, a delegate of APRA:
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
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.
This instrument commences on 1 July 2025.
Dated: 13 April 2025
Sean Carmody
Executive Director
Policy and Advice Division
Interpretation
In this instrument:
APRA means the Australian Prudential Regulation Authority.
ADI, authorised NOHC and prudential standard have their respective meanings given in subsection 5(1) of the Act.
Schedule
Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk comprises the document commencing on the following page.
In this instrument: In this instrument:
In this instrument:
APRA means the Australian Prudential Regulation Authority.
ADI, authorised NOHC and prudential standard have their respective meanings given in subsection 5(1) of the Act.
Schedule
Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk comprises the document commencing on the following page.
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] 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.
Detailed risk-weight schedules for property exposures (Attachment A), non-property exposures (Attachment B), defaulted exposures (Attachment E), and many specific asset classes including sovereigns, banks, corporates, retail, specialised lending, equity, leases, covered bonds and more.
Credit risk mitigation (CRM) rules that prescribe when guarantees, collateral, credit derivatives or other techniques may reduce capital requirements, and the minimum legal and operational conditions for recognition (see "Credit risk mitigation" section and Attachments G, I, J).
Specific calibrations such as supervisory haircuts for collateral (Attachment G, Table 23), conversion factors for off-balance sheet items (Attachment C, Table 17), and a 1.5x risk-weight multiplier for certain unhedged currency-mismatch retail or residential exposures originated after 1 January 2023 (Attachment B, "Risk weight multiplier", paras 1-2).
The standard is prescriptive about classification rules and documentation requirements that directly affect RWA outcomes. Examples include detailed criteria for classification of a property loan as a "standard" loan (Attachment A, paras 3-7), LVR calculation rules and valuation maintenance (Attachment A, paras 10-11), the precise conditions under which lenders' mortgage insurance (LMI) can reduce capital (Attachment A, "Lenders’ mortgage insurance"), and legal enforceability standards for netting and collateral (Attachments H and G respectively).
APS 112 also delegates certain discretionary determinations to APRA. For example, APRA may decide whether a government guarantee scheme qualifies for a preferential risk weight (Attachment A, para 1.1) and APRA approval is required for some ADI methodologies (e.g. use of an internal ratings-based approach is constrained in Attachment G, para 2). Where the standard requires ADI notifications to APRA (for example, prior notification when selling certain credit protection described in Attachment J, "Sold credit protection"), the standard creates explicit reporting/consent points that will involve APRA decisions.
In short, the instrument operationalises how ADIs calculate credit risk RWA under the standardised approach, sets precise risk weights and operational/legal conditions for CRM, defines classification and valuation criteria across asset classes, and creates APRA decision points and notification requirements that ADIs must observe from 1 July 2025.
Main concepts
APS 112 organises credit-risk capital into a small set of durable concepts that are applied across exposures and asset classes. The main concepts, as the standard frames them, are: exposure measurement (book value and EAD), risk weights, exposure classification, credit risk mitigation, haircuts and maturity/currency mismatch adjustments, netting, and supervisory oversight.
Exposure measurement
On-balance sheet exposures are measured by current book value, including accrued interest and revaluations, net of provisions and partial write-offs (Risk-weighted on-balance sheet assets, para 1).
Off-balance sheet items are converted to on-balance sheet equivalents via exposure at default (EAD) using Commitment Conversion Factors (Attachment C) or derivative-specific rules under APS 180 and Attachment G (Risk-weighted off-balance sheet exposures, paras 1.1-1.2).
Risk weights
The standard maps exposures to risk weights that translate measured exposures into risk-weighted assets. Attachments A and B contain tiered tables for property and non-property exposures respectively; other attachments contain specific tables for defaulted exposures, SFTs, covered bonds, banks, sovereigns, corporates, SMEs and more. For sovereigns and PSEs, risk weights are mapped via external credit rating grades (Attachment B, "Sovereign exposures" and Table 5-6). For corporates, the standard prescribes risk-weight buckets by long-term issuer grade or, for unrated exposure, specific SME or other treatments (Attachment B, Tables 10-13).
Exposure classification
Classification rules determine which risk-weight table applies. Examples: "standard" v "non-standard" property loans are defined by operational criteria including enforceable security, valuation independence, and serviceability assessment (Attachment A, paras 1-7). Specialized lending is defined by economic/legal characteristics such as project finance and object finance (Attachment B, paras 26-27). Retail, margin lending, equity, lease residuals and subordinated debt have their own class definitions and risk calibrations.
Credit risk mitigation (CRM)
CRM covers guarantees, collateral and credit derivatives. The standard prescribes detailed eligibility criteria, legal enforceability requirements and operational conditions (Attachments G, I, J). If multiple CRM techniques attach to a single exposure, the ADI must split the exposure by covered portions and calculate RWA separately (Credit risk mitigation section, para 1). CRM that is already embedded in an ECAI issue-specific rating cannot be double counted (para 2). Legal enforceability across jurisdictions is a recurring condition (Attachment G and H).
Haircuts and mismatch adjustments
APS 112 prescribes supervisory haircuts for collateral and exposures (Attachment G, Table 23), a haircut for currency mismatch (8 per cent base, Attachment G, para on currency haircut), and maturity-mismatch adjustments with formulas to scale collateral or guarantee amounts when collateral/guarantee residual maturity is shorter than the exposure (Attachment G, "Collateral maturity mismatch"; Attachment I, "Maturity mismatch").
Netting
Close-out netting and netting by novation may be recognised for capital purposes where agreements meet strict legal and operational criteria (Attachment H). ADIs must obtain reasoned legal opinions confirming enforceability under all relevant jurisdictions and maintain policies and records evidencing netting arrangements (Attachment H, "Legal enforceability").
External credit ratings and mapping
Use of external credit assessment institution (ECAI) ratings is limited to solicited ratings, and ADIs must map ratings to the prescribed grade tables (Attachment F). Where an ADI uses ratings, it must perform due diligence and cannot apply due diligence to derive a lower risk weight than the rating implies (Attachment F, paras 1-3). Multiple ratings are treated conservatively; where two ratings map to different grades, the higher (more conservative) risk weight is used (Attachment F, "Multiple assessments").
Operational requirements and governance
The standard repeatedly insists on documented policies, periodic reviews, valuation practices (consistent with APS 220), netting and collateral management policies, dispute monitoring for margin calls and systems to support semi-annual or more frequent reporting for particular instruments such as covered bonds (Attachment G, paras 16-17).
Special calibrations
Several specific calibrations are notable: the 1.5× risk-weight multiplier for unhedged retail/residential exposures with currency mismatch originated after 1 January 2023 (Attachment B); specific LVR-based buckets for residential and commercial property with differentiated treatment for owner-occupied v other loans and for LMI presence (Attachment A, tables); high risk weights for exposures originated through third parties (fixed 150 per cent, Attachment B, "Exposures through a third party"); and supervisory haircuts and minimum holding periods for SFTs and other collateralised transactions (Attachment G, Tables 23 and 24).
Incentives structured by the standard
The standard ties capital relief to specific legal, documentation and operational practices: enforceable collateral and guarantees, qualifying LMI, recognised ECAI ratings, recognized netting agreements and approved internal methodologies. These conditions create incentives for ADIs to invest in legal due diligence, documentation, valuation capabilities and monitoring systems where capital benefit flows from compliance with the prescriptive tests.
Each of these main concepts is expressed through prescriptive paragraphs and numerical tables that determine how an ADI converts economic exposures into RWA and therefore how much regulatory capital it must hold.
Who it affects
APS 112 explicitly applies to all ADIs and authorised NOHCs, as stated in the instrument's commencement and application paragraphs: the instrument is determined under subsection 11AF(1) of the Banking Act 1959 and "applies to all ADIs and authorised NOHCs to the extent provided in paragraphs 2 to 4 of the prudential standard" (instrument preamble). Practically, the affected parties fall into several categories.
Primary entities required to comply
ADIs: all deposit-taking institutions authorised under the Banking Act that operate in Australia. APS 112 sets the calculation methodology for credit risk RWA that such entities must apply from 1 July 2025.
Authorised NOHCs: non-operating holding companies authorised under the Act, insofar as the prudential standard applies to them under paragraphs 2 to 4 (referenced in the instrument preamble).
Internal stakeholders within affected entities
Risk and capital management teams: required to implement RWA calculation processes, apply the tables and formulas in Attachments A-J, maintain valuation and LVR records, and perform due diligence on external ratings and CRM instruments.
Legal and compliance teams: required for legal enforceability reviews for collateral, guarantees and netting arrangements, to obtain written and reasoned legal opinions (Attachment H, "Legal enforceability"), and to ensure documentation meets the irreversibility, unconditionality and explicit coverage requirements across attachments.
Credit origination, underwriting and portfolio management: required to collect and retain origination data (serviceability, LVR, valuation), to apply the standard's loan classification criteria (standard v non-standard), and to maintain monitoring records for treatment changes (for example, reclassification after 36 months of performance for certain loans in Attachment A).
Treasury and derivatives desks: responsible for correctly classifying SFTs, calculating EAD under Attachment G, applying haircuts and margining frequency factors, and for meeting the detailed requirements applicable to covered bonds and cash/market collateral treatment.
Third parties and market participants affected indirectly
Lenders' mortgage insurers (LMIs): the capital benefit for ADIs from LMI requires LMIs to be "eligible" as defined: regulated by APRA for Level 1 capital treatment or by an overseas prudential regulator for Level 2 subsidiaries (Attachment A, "Lenders’ mortgage insurance").
External Credit Assessment Institutions (ECAIs): the standard restricts use to solicited ECAI ratings and prescribes mapping tables (Attachment F). The availability and grade of ratings will affect ADIs’ ability to assign lower risk weights to exposures.
Guarantors, protection sellers and counterparties in credit derivatives: must meet eligibility criteria set out in Attachments I and J to be recognised as CRM. The standard lists eligible guarantors and protection providers: sovereigns, banks, externally rated entities and, for some securitisation protection, entities with particular rating grades (Attachments I and J).
Custodians and custodial third parties: requirements for segregation of collateral and enforceability clauses in custody arrangements (Attachment G, para 4).
Geographic and currency considerations
Domestic exposures to the Australian Government and the Reserve Bank of Australia denominated and funded in Australian dollars may be risk-weighted at zero per cent (Attachment B, "Sovereign exposures", para 3.1). For cross-border exposures or collateral held in overseas branches, ADIs must confirm the branch will act according to the governing agreement (Attachment G, para 5).
Types of business activity affected
Retail and mortgage lending: the standard contains detailed loan-to-valuation (LVR) rules, LMI recognition, and risk weights that vary materially with LVR, owner-occupied status and whether a loan is standard or non-standard (Attachment A).
Commercial real estate and ADC finance: commercial property has separate risk-weight schedules and further classifications where repayment depends on property cashflows (Attachment A); ADC exposures face elevated risk weights unless stringent pre-sale and development cost conditions are met (Attachment A, paras 27-29).
Trading and SFT activity: ADIs engaged in securities lending, repo and reverse repo must apply Attachment G for EAD, haircuts, and remargining frequency rules; SFTs meeting strict criteria may be risk-weighted at 10 per cent or zero for core market counterparties (Attachment G, paras on simple approach and para 4 of "Risk weights under the simple approach").
Use/sale of credit protection: sellers and buyers of credit protection via credit derivatives face notification and assessment obligations (Attachment J, "Sold credit protection" para 1).
Time and transition scope
The standard applies from 1 July 2025. Some provisions reference origination dates (for example, exposures originated before 1 January 2023 may be treated differently in some valuation rules for commercial property and LVR; Attachment A, para 11(a)(2)), which creates different treatments for legacy portfolios.
Who decides
ADIs make the day-to-day decisions required by the standard: loan classification, valuation, CRM recognition, haircut application, and EAD calculation. APRA retains decision authority in areas where the standard explicitly requires APRA determination or approval (for example, APRA may determine whether government guarantee schemes receive a particular treatment, Attachment A, para 1.1; ADIs must notify APRA prior to selling certain credit protection, Attachment J).
In short, the standard affects any entity that is an ADI or authorised NOHC in Australia, with operational consequences for credit origination, risk, legal, treasury and compliance functions, as well as material downstream effects for counterparties providing guarantees, ratings, custody or insurance.
Key duties and rights
APS 112 imposes specific duties on ADIs and, to a lesser extent, creates prescriptive rights for recognition of CRM where conditions are met. The standard does not phrase obligations in rights/privileges language, but it makes recognition conditional; where the conditions are satisfied ADIs are entitled to capital relief. The key duties and conditional rights are set out below, with references to the relevant parts of the standard.
Duty to measure exposures and calculate RWA
An ADI must calculate on-balance sheet RWA by multiplying current book value by the applicable risk weight; the book value includes accrued interest and revaluations and is net of provisions and write-offs (Risk-weighted on-balance sheet assets, para 1).
For non-SFT off-balance sheet exposures, ADIs must first determine EAD using Attachment C or APS 180 as relevant, then multiply the EAD by the relevant risk weight (Risk-weighted off-balance sheet exposures, para 1.1).
For SFTs, ADIs must calculate EAD under Attachment G and apply risk weights to both counterparty exposure and any retained credit/market risk in securities lent or posted (Risk-weighted off-balance sheet exposures, para 2).
Duty to classify exposures correctly
ADIs must apply the standard's definitional tests to classify property exposures as residential, commercial, ADC, owner-occupied, other standard, standard v non-standard (Attachment A, paras 1, 14, 27-29). Loans failing the serviceability and valuation verification requirements must be classified as non-standard (Attachment A, para 5).
Specialised lending exposures must be identified and classified into project finance, object finance or commodities finance where the characteristics in Attachment B, para 26 are met.
Documentation and valuation duties
ADIs must appropriately document, assess and verify borrowers’ repayment capacity prior to loan approval, including serviceability under higher interest rates and assessment of ongoing existing debt commitments (Attachment A, para 5(a)-(c)).
Property valuations must be independent and prudently conservative, consistent with APS 220 (Attachment A, para 11(a)) and the standard specifies when origination values must be maintained or updated.
Duty to demonstrate legal enforceability and operational capacity for CRM, netting and collateral
To obtain capital relief under CRM, documentation must be binding and legally enforceable in all relevant jurisdictions, and ADIs must undertake sufficient legal review and periodic reviews of enforceability (Credit risk mitigation, para 4; Attachment G, paras 1-6; Attachment H, "Legal enforceability").
To recognise netting, ADIs must obtain written and reasoned legal opinions covering relevant jurisdictions and maintain policies to review enforceability (Attachment H, "Legal enforceability").
Custody arrangements must ensure segregation and enforceability; collateral held overseas must bind the branch to the governing agreement (Attachment G, paras 4-5).
Duty to perform due diligence on external ratings and not to downgrade based on due diligence
Where ECAI ratings are used, ADIs must only use solicited ratings, perform due diligence to ensure ratings are conservative, and if due diligence finds higher risk characteristics, the ADI must assign at least one bucket higher risk weight than the rating implies. Due diligence may not result in a lower risk weight than the external rating (Attachment F, paras 1-3).
Duty to split exposures where multiple CRM or differing maturities exist
If multiple CRM techniques cover a single exposure, the exposure must be divided into portions covered by each technique and RWAs calculated separately (Credit risk mitigation, para 1).
If a single protection provider has differing maturities, the ADI must subdivide the protected portions (Credit risk mitigation, para 1; Attachment I, "Maturity mismatch").
Duty to notify APRA and obtain approvals where required
Selling credit protection that is not detailed in specific paragraphs in Attachment J requires a written assessment prior to execution and notification to APRA, and the ADI must provide the assessment on request (Attachment J, "Sold credit protection", para 1).
The standard notes APRA approval and determination points, for example APRA may determine applicability of the Home Guarantee Scheme capital treatment and may require alternative methodologies in some cases (Attachment A, para 1.1; Attachment J, "Sold credit protection" para 1).
Duty to maintain policies and systems
ADIs must maintain netting policies, collateral risk management policies, margining operations resources, records for covered bonds and other transactions, and implement monitoring and reporting arrangements (Attachments G and H refer to such governance duties, e.g. Attachment G, paras 2-7 and 16-17; Attachment H, paras 2-3).
Conditional rights to capital relief
Where ADIs satisfy the detailed legal, operational and documentation requirements, they have the conditional right to apply lower risk weights or substitute guarantor/protection seller risk weights for the covered portion of exposures (Attachments I and J).
Specific capital treatments can be applied if conditions are met, such as 35 per cent risk weight for exposures in the Australian Government Home Guarantee Scheme when a guarantee certificate is issued and active (Attachment A, para 1.1).
Specific duties carrying numeric consequences
ADIs must apply tables and formulas exactly as set: conversion factors in Attachment C, supervisory haircuts and margining frequency adjustments in Attachment G, and defaulted exposure tables in Attachment E, among others. These numeric prescriptions directly determine how much RWA an ADI must report.
Reporting and record retention duties
APS 112 contains requirements to have information available at specified frequencies, for example semi-annual information on covered bond cover pools and outstanding bonds (Attachment B, para 16), and records to support netting and CRM.
In combination, these duties require ADIs to implement legal, credit, valuation, collateral and operational frameworks that mirror the standard’s detailed tests, and where those tests are met ADIs are entitled to the capital treatments the standard prescribes.
Penalties and enforcement
The determination is made under subsection 11AF(1) of the Banking Act 1959 and revokes the prior determination under subsection 11AF(3). The instrument itself prescribes mandatory prudential requirements for ADIs and authorised NOHCs, including precise calculation rules and eligibility conditions for capital relief. The standard contains several explicit supervisory obligations and notification requirements; for example, ADIs must notify APRA prior to executing certain sold credit protection transactions and provide written assessments on the capital treatment in advance (Attachment J, "Sold credit protection", para 1).
Direct statements of criminal or civil penalties are not set out within APS 112 itself. The instrument does, however, create mandatory prudential obligations that an ADI must follow in calculating RWA and recognising CRM, netting and other capital-reducing mechanisms. Enforcement of compliance with prudential standards such as APS 112 is logically situated in the Banking Act 1959 and APRA’s supervisory remit, as reflected by the instrument’s reliance on subsection 11AF to make the determination. APS 112 refers to APRA’s determinations and approvals in multiple places, for example APRA determining whether a government guarantee scheme treatment applies (Attachment A, para 1.1) and APRA being the recipient of required prior notifications (Attachment J).
Concrete enforcement mechanisms and outcomes are not described in the text of APS 112 beyond these supervisory interactions. The standard creates compliance points that APRA can check: ADI policies, legal opinions, documentation, notification of certain transactions and records required for audit and supervisory review (for example, records for netting, collateral, and covered bonds in Attachments G, H, and B). ADIs have explicit obligations to obtain and maintain legal opinions and to conduct periodic reviews; failure to do so would leave the ADI unable to lawfully recognise CRM or netting for capital purposes under APS 112’s terms.
Where the standard requires an ADI to obtain APRA approval or to notify APRA prior to certain transactions, APRA acts as the decision-maker on whether the ADI may apply a particular capital treatment. Examples:
APRA may determine application of the Home Guarantee Scheme capital treatment (Attachment A, para 1.1).
An ADI must notify APRA and provide written assessments prior to selling credit protection that is not covered by the specific provisions in Attachment J (Attachment J, "Sold credit protection", para 1).
Because APS 112 is a prudential standard made under the Banking Act, enforcement activity for non-compliance with the standard will proceed through APRA's supervisory channels provided by the Banking Act and related regulatory framework; these supervisory powers are not reiterated in APS 112 itself but are implicit in the instrument’s legal basis under subsection 11AF. The standard is designed so that non-compliance has immediate capital measurement consequences: failure to meet conditions for CRM or netting simply means the ADI cannot apply the lower risk weight or substitute the guarantor's risk weight, and therefore must hold higher regulatory capital. The standard thus embeds enforcement by denying capital relief when its tests are not met, and by creating APRA notification and approval points for specified transactions.
In summary, APS 112 prescribes mandatory capital measurement rules and creates supervisory notification and approval points. It does not itself create a schedule of criminal or civil penalties; enforcement is exercised through APRA's supervisory authority under the Banking Act, and non-compliance typically manifests in either denial of capital relief or other supervisory actions under APRA’s statutory powers as exercised pursuant to the Banking Act.
How it interacts with other laws
APS 112 is a prudential standard determined under subsection 11AF of the Banking Act 1959 and explicitly references other prudential standards and legal instruments as part of its methodology. The standard both relies upon and constrains interactions with other regulatory instruments and private law elements. The text refers to these interactions in several concrete ways.
Relationship with the Banking Act 1959
APS 112 is made under the Banking Act, specifically subsection 11AF(1) for the determination and subsection 11AF(3) for revocation of earlier determinations. The standard’s legal force derives from that statutory power: it applies to ADIs and authorised NOHCs as determined under the Act (instrument preamble). APS 112 does not reproduce APRA’s enforcement powers under the Act, but it situates its binding requirements within that statutory framework.
Cross-references to other prudential standards
APS 112 cross-refers to APS 111 for deductions from Common Equity Tier 1 Capital and to Attachment D of APS 111 for portfolio-level fair value loss adjustments (Risk-weighted on-balance sheet assets, para 1).
APS 112 requires valuations to be consistent with APS 220 standards (Attachment A, para 11(a)). APS 180 is referenced for the treatment of OTC and exchange-traded derivative transactions and long-settlement transactions for significant ADIs (Risk-weighted off-balance sheet exposures, para 1.1).
APS 120 is referenced for definitions and treatments of securitisation and related instruments (Attachment G, eligible collateral paragraph referencing senior securitisation exposures as defined in APS 120).
Interaction with private law and international private arrangements
Legal enforceability tests for netting, collateral and guarantees require legal opinions and cross-jurisdictional enforceability checks (Attachment H, "Legal enforceability"; Attachment G, paras 1-6). These requirements interact with private law across relevant jurisdictions, since an ADI must confirm that the ADI’s recourse and netting rights will be respected under the applicable laws, including the law governing the counterparty and the law governing the contract.
Where collateral is held with third parties or custodians (including overseas branches), APS 112 requires contractual and operational arrangements that ensure segregation and that the custodian will act in accordance with the ADI’s agreements (Attachment G, paras 4-5). This creates an interaction between the prudential standard and custody/agency contracts under private law.
Interaction with external credit ratings and third-party regulation
Use of ECAI ratings is conditioned on the ratings being solicited and appropriate for the full extent of the exposure, and ADIs must perform due diligence (Attachment F). This creates a dependency on third-party rating activity, which is itself regulated differently in various jurisdictions.
LMI eligibility for capital relief requires that the insurer be regulated by APRA for Level 1 capital treatment, or by an overseas prudential regulator for Level 2 treatment (Attachment A, "Lenders’ mortgage insurance"). That links the capital treatment to the prudential status of the insurer under home-country regulation.
Interaction with government schemes and public guarantees
APS 112 allows ADIs to apply a 35 per cent risk weight to exposures included in the Australian Government’s Home Guarantee Scheme where a guarantee certificate has been issued, and this treatment ceases when the certificate expires or APRA determines it no longer applies (Attachment A, para 1.1). APRA may also determine that similar schemes by Australian States or Territories or the Commonwealth qualify. This provision creates a direct interaction between public guarantee instruments (deeds, certificates) and APRA’s capital regime.
Tax, insolvency and cross-border law considerations
The standard does not directly address tax or insolvency law, but its legal enforceability requirements necessarily implicate insolvency law when assessing netting and collateral enforceability in default or bankruptcy scenarios (Attachment H, "Legal enforceability", para 1.1 requires legal opinions that in default or bankruptcy courts would find exposure limited to a single net sum).
Operational interactions with market infrastructure
For covered bonds and SFTs, APS 112 requires settlement across established systems and expects standard market documentation for certain capital treatments (Attachment G, para 4 under "Risk weights under the simple approach" references established settlement systems and standard market documentation for SFTs). This creates interactions with securities settlement systems and central counterparties, and with market-standard ISDA or repo documentation.
Compliance with other prudential standards and supervisory expectations
APS 112 repeatedly references the need to be consistent with broader APRA expectations on governance, valuations and operational infrastructure, implying that compliance will be assessed in the context of an ADI’s overall prudential framework. For instance, Attachment G requires collateral risk management policies and resources; Attachment H requires netting policies and record-keeping.
In sum, APS 112 operates within a network of statutory, prudential and private law instruments. It prescribes capital measurement mechanics that depend on external credit ratings, legal enforceability under private law across jurisdictions, compliance with related APRA prudential standards, and interactions with market infrastructure and public guarantee instruments.
Amendment history
The instrument text itself records immediate recent amendment activity. Key items in the amendment history visible in the document are:
Revocation of the prior determination: The instrument revokes Banking (prudential standard) determination No. 1 of 2024, including Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk made under that determination. This revocation is effected under subsection 11AF(3) of the Banking Act 1959, as stated in the instrument preamble (instrument text, opening lines).
New determination date and commencement: The new determination is dated 13 April 2025 (signed by Sean Carmody, Executive Director, Policy and Advice Division) and commences on 1 July 2025 (instrument preamble).
The schedule to the instrument contains the full text of the new APS 112 that takes effect on the commencement date; the schedule re-states certain definitions used in the instrument (for example, APRA, ADI, authorised NOHC, prudential standard).
Within the body of APS 112 itself there are internal temporal references that create transitional treatments for exposures originated earlier than particular dates:
Certain property exposures originated prior to 1 January 2023 with no material change to loan terms since that date need not satisfy some of the “standard” loan criteria (Attachment A, para 7).
For commercial property exposures originated prior to 1 January 2023, an ADI may use the current valuation rather than origination valuation for certain LVR calculations (Attachment A, para 11(a)(2)).
The risk weight multiplier for certain currency-mismatch exposures is specified as applying for exposures originated after 1 January 2023 (Attachment B, "Risk weight multiplier", para 1).
APRA retainment of discretions and approval points means the standard in practice can be amended by APRA in future determinations or by APRA issuing decisions under the Banking Act with the statutory mechanism in subsection 11AF. The instrument revoking the 2024 determination and replacing it with this 2025 determination demonstrates that APS 112 is a living prudential standard that APRA updates by issuing determination instruments under s11AF.
The instrument does not provide an extended history beyond the revocation of the 2024 determination. It does not, within its text, include a schedule of prior amendments or past versions beyond the immediate replacement. Where APS 112 cross-refers to other APRA standards (for example, APS 111, APS 120, APS 180, APS 220), those standards have their own amendment histories that will affect interactions, but such histories are not recorded within APS 112.
Finally, since APS 112 contains explicit references to pre-2023 origination dates for some transitional treatments, ADIs will need to track origination dates and any material changes to loan terms to apply the correct historical or current treatment when the standard takes effect on 1 July 2025.
Litigation history
APS 112 as presented in this instrument does not include or reference any litigation history. The text contains no citations to judicial decisions or administrative law proceedings. There are no cases named within the instrument or any attachments.
Because APS 112 is a prudential standard made under the Banking Act 1959, disputes about its application could, in principle, become the subject of administrative review or litigation in the future, for example judicial review of APRA decisions or disputes about legal enforceability of netting or collateral under private law. However, the instrument itself does not identify any existing or prior litigation, nor does it attach commentary on case law.
Users should note two points as they consider litigation risk even though APS 112 does not record litigation:
APS 112 requires ADIs to obtain written and reasoned legal opinions on enforceability across relevant jurisdictions for netting and collateral arrangements (Attachment H, "Legal enforceability"; Attachment G, paras 1-6). Those legal opinions necessarily depend on the state of private law and any relevant judicial authority in the jurisdictions concerned. Consequently, litigation that changes interpretations of insolvency, netting or security law in relevant jurisdictions could affect an ADI’s ability to recognise CRM or netting under APS 112.
Where APRA exercises discretionary decisions under the Banking Act (for example determining whether a particular guarantee scheme is eligible for a preferential treatment), such decisions could be the subject of administrative law challenges. APS 112 itself prescribes notification and approval points (e.g. Attachment J, "Sold credit protection", para 1) that create potential administrative law pathways if ADIs disagree with APRA’s response.
Because the instrument does not list any litigation, a practitioner preparing compliance or litigation risk materials should assume no judicial interpretation of APS 112 exists yet and should plan to rely on the text of the standard, supporting APRA guidance and prevailing private law principles when assessing enforceability and capital treatment questions.
Gotchas
APS 112 is detailed and technical. A number of provisions create non-obvious consequences, operational frictions and traps for ADIs that wish to obtain capital relief. The following practical "gotchas" are grounded in the instrument text and identify concrete places where implementation risk, compliance cost or surprising capital outcomes arise.
Classification depends on documentation and timing, not only economics
A loan that looks economically similar to a typical owner-occupied loan can be a "non-standard" loan if the ADI’s origination documentation and verification do not meet the standard’s explicit criteria. Attachment A, para 5 requires the ADI to have documented and verified borrower serviceability, including stress testing for higher rates. Loans originated prior to 1 January 2023 can escape some new requirements if there have been no material changes, but reliance on this grandfathering is narrow (Attachment A, para 7).
LVR calculation can aggregate second mortgages and sequential loans
When multiple loans are secured by the same property and are sequential in ranking, the ADI must aggregate the loans for LVR calculations. If a loan is secured by a second mortgage, the LVR must reflect the sum of all claims secured by both first and second mortgages (Attachment A, "Loan-to-valuation ratio", para 2). This can materially increase LVRs and push exposures into higher risk-weight buckets.
Haircuts and currency mismatch multiplier are specific and unforgiving
Attachment G prescribes supervisory haircuts and an 8 per cent haircut for currency mismatch, with precise formulas for margining frequency adjustment factors and maturity mismatch adjustments. Attachment B introduces a 1.5 times multiplier for unhedged retail/residential exposures where lending currency differs from the borrower’s income currency for exposures originated after 1 January 2023. Mis-identifying a hedge (natural or financial) or failing to document a hedge covering 90 per cent of repayment can trigger the multiplier and materially raise capital.
CRM recognition requires enforceability across jurisdictions
To obtain capital relief from collateral, guarantees or netting, APS 112 requires legal enforceability in all relevant jurisdictions and periodic review (Credit risk mitigation, para 4; Attachment H). An ADI that relies on a local legal opinion without confirming enforceability in the debtor’s or collateral holding jurisdiction risks denial of CRM recognition.
External rating use is constrained
Only solicited ECAI ratings may be used (Attachment F, para 1). If an ADI uses ratings, due diligence that finds greater risk must result in a higher risk weight, not a lower one (Attachment F, para 3). Multiple ratings mapping to different grades must be treated conservatively (Attachment F, "Multiple assessments").
Off-balance sheet treatment depends on fine-grained definitions
Attachment C defines what constitutes a commitment and allows an arrangement to be excluded as a commitment only if several strict conditions are met, including no fees to establish/maintain and independent pre-drawdown creditworthiness checks (Attachment C, para 2). Failing one condition transforms the instrument into a committed exposure attracting a CCF and higher capital.
Covered bonds have ongoing reporting conditions
Preferential risk weights for covered bonds require that qualifying criteria are satisfied at issuance and at all times throughout the bond’s remaining maturity, including cover pool composition, over-collateralisation and semi-annual reporting availability (Attachment B, paras 15-16). Failure to continuously meet these conditions will convert the treatment to the bank exposures table.
Special rules for ADC and pre-sales
ADC exposures face a 150 per cent risk weight unless strict conditions are met, including pre-sales equal to 100 per cent of total debt when exposure exceeds $5 million for a single development and total debt to qualifying development costs below 75 per cent (Attachment A, para 29). These thresholds are operationally exacting for property developers and lenders.
Exposures originated through third parties carry a flat 150 per cent risk weight
Where an ADI does not perform credit assessment, cannot administer workout/default and lacks direct recourse to borrower or third party, the exposure must be risk-weighted at 150 per cent regardless of counterparty characterisation (Attachment B, "Exposures through a third party", para 1). This penal treatment requires ADIs to review distribution and originator arrangements.
Selling credit protection can trigger pre-execution notification and post hoc supervisory review
Attachment J requires an ADI to undertake a written assessment and notify APRA prior to executing sold credit protection not covered by explicit paragraphs, and to apply the treatment set out unless APRA determines otherwise. This introduces a potential approval bottleneck and advance documentation burden for product structuring.
Netting legal opinion standards may be high and ongoing
The legal opinion required for recognising netting must be reasoned and cover laws of jurisdictions where the counterparty is incorporated, the law governing transactions, and any law necessary to give effect to netting (Attachment H, "Legal enforceability", para 1.1). ADIs must continually monitor these opinions because changes in law or supervisory notices (including where foreign supervisors express doubt) require the ADI to stop recognising the netting agreement (para 1.2).
Operational frequency requirements matter for haircuts and margining factors
Minimum holding periods and remargining frequencies feed into the margining frequency adjustment factor which scales haircuts and EAD calculations (Attachment G, Table 24 and formula). Large netting sets or disputes can increase the required holding period and therefore increase capital. ADIs with significant trading activity must monitor netting set sizes and dispute histories.
Equity and residual value exposures attract large risk weights
Equity exposures that are not deducted under APS 111 carry high risk weights (250 per cent for listed, 400 per cent for unlisted); residual lease values higher than 10 per cent of Tier 1 capital can carry risk weights up to 250 per cent (Attachment B, "Equity" and "Leases").
Conversion factors and off-balance sheet CCFs are not intuitive
Attachment C’s CCF table assigns 100 per cent to a number of apparently short-term items including direct credit substitutes and securities lending. Using the lower of the CCF applicable to a commitment and to an off-balance sheet exposure is allowed, which implies ADIs must carefully map instruments to the correct CCF to avoid overstating EAD.
These gotchas translate into implementation tasks: ADIs must inventory portfolios, map exposures to the correct attachment and table, ensure legal enforceability across jurisdictions, validate hedges and haircuts, and ensure that origination documentation supports the capital treatments the ADI seeks to apply.
How to comply
APS 112 is prescriptive. Compliance requires legal, credit, actuarial, treasury and operational changes. Below is a practical compliance roadmap structured as an operational checklist keyed to specific APS 112 requirements.
Governance and project oversight
Establish an APS 112 implementation steering group including legal, credit risk, capital, treasury, operations, and IT.
Map responsibilities and document policies to reflect the standard’s requirements: netting policy, collateral risk management policy, CRM policies, valuation policy, issue rating usage policy, and capital calculation methodology documentation (refer Attachments G, H, I, F and general governance references).
Data, classification and inventory
Create an authoritative exposure inventory capturing loan origination dates, security types, LVR calculations, whether borrower income currency differs from loan currency, mortgage ranking, pre-sales for ADC projects, guarantee/insurance coverage, and ECAI ratings where applicable (Attachment A on LVR and originations; Attachment B on multiplier and rating usage).
Tag exposures originated before 1 January 2023 and record any material changes to loan terms to determine grandfathered treatments (Attachment A, para 7).
Legal enforceability and documentation
Obtain written and reasoned legal opinions confirming enforceability of netting agreements, collateral security interests, and guarantee obligations across all relevant jurisdictions involved in the exposure, as required by Attachment H and Attachment G.
Ensure CRM documentation is irrevocable, unconditional and explicitly references covered exposures or pools (Attachments I and J, "Minimum requirements").
For custody arrangements, ensure contractual segregation of collateral and clear rights to liquidate in default (Attachment G, paras 4-6).
Valuation and LVR processes
Align property valuation processes with APS 220 as required (Attachment A, para 11(a)), including independent valuations and conservative criteria.
Put in place rules for LVR calculation: include outstanding amounts plus undrawn committed amounts, aggregate sequential loans, handle second mortgages by including first mortgage amounts for LVR (Attachment A, "Loan-to-valuation ratio", para 2).
For mixed residential/commercial security, apply a 40 per cent haircut to commercial property value included in LVR calculations where residential exposures are secured by both (Attachment A, para 11(a)(2)).
CRM procedures and haircuts
Decide whether to adopt the simple or comprehensive approach for collateralised transactions and apply consistently across banking book collateralised exposures (Attachment G, para 2).
Implement supervisory haircut tables and the margining frequency adjustment factor in EAD calculations and ensure daily marking-to-market and remargining processes meet the minimum frequency tests (Attachment G, Table 23 and paras 28-32).
For currency mismatches, document and verify natural or financial hedges covering at least 90 per cent of loan repayment amounts to avoid the 1.5× multiplier for consumer residential lending (Attachment B, "Risk weight multiplier", paras 1-2).
Netting and SFT operational readiness
For netting recognition, obtain the necessary legal opinions and document netting policies, systems, and records per Attachment H.
For SFTs, ensure settlement across established systems, daily remargining where required, standard market documentation and timely liquidation rights; these elements impact the ability to apply preferential SFT risk weights (Attachment G, "Risk weights under the simple approach", para 4).
External ratings and due diligence
Establish processes to use only solicited ECAI ratings, maintain an ECAI list and mapping to credit rating grades per Attachment F, Tables 21-22, and perform documented due diligence that triggers higher risk-weight buckets if creditworthiness appears worse than the rating indicates (Attachment F, paras 1-3).
Ensure that rating usage is consistent across exposure classes and that issue-specific ratings are applied when available (Attachment F, "Issue-specific and issuer ratings").
Special product and transactional controls
For selling credit protection, prepare the written assessment template and notification workflow to APRA and ensure pre-execution review channels are in place (Attachment J, "Sold credit protection").
For covered bonds, set up semi-annual reporting and monitoring for cover pools, overcollateralisation and eligibility criteria, and include processes to revert to bank exposure risk weights should criteria fail (Attachment B, paras 15-16).
For ADC exposures, implement underwriting criteria to confirm pre-sales, development cost metrics and the ADI’s policy on qualifying pre-sales if ADI intends to apply the 100 per cent risk weight concession (Attachment A, para 29).
Model and calculation controls
Implement the RWA calculation engine to apply exact tables and formulas in Attachments A-J, including conversion factors (Attachment C), margining frequency factors (Attachment G), supervisory haircuts (Attachment G, Table 23), and defaulted exposure risk weights (Attachment E, Tables 19-20).
Maintain audit trails and deterministic mapping logic so supervisors and internal auditors can recreate RWA numbers.
Ongoing monitoring, review and reporting
Conduct periodic (and event-driven) reviews of legal enforceability opinions, collateral segregation arrangements, and valuation assumptions. APS 112 explicitly requires periodic reviews for enforceability and ongoing availability of information (e.g. covered bonds require semi-annual data availability, Attachment B, para 16).
Monitor netting set sizes and margin call dispute frequencies as they affect minimum holding periods and therefore haircuts and EADs (Attachment G, paras 30-31).
Prepare to provide APRA with policy documents, legal opinions and transaction-specific assessments on request, and ensure the internal record-keeping meets the requirements for netting and CRM recognition.
Training and internal controls
Train credit origination, legal, treasury and operations teams on the standard’s definitions and thresholds (for example, the $75 million consolidated revenue threshold for SMEs, Attachment B, para 1).
Update internal control and validation procedures to check correct application of LVR aggregation rules, haircut application, maturity mismatch adjustments and classification between standard and non-standard loans.
Contingency planning
Model capital impacts of losing CRM recognition or netting, to ensure capital adequacy if a legal opinion fails or APRA declines a requested treatment.
Engage with APRA early on material or novel transactions that require notification or prior approval under APS 112 (e.g. novel sold credit protection, covered bond structures, or consolidated group treatments).
By following this checklist and mapping each internal control and policy to the specific paragraph or table in APS 112, an ADI can create a defensible compliance posture that aligns documentation, legal opinions and operational processes with the standard’s capital treatments.
Part Attachment A — Risk weights for propertyAttachment A — Risk weights for property exposures
The RWA of a non-SFT off-balance sheet exposure must be calculated by applying the following two-step process:
first, the exposure amount or exposure at default (EAD), representing the on-balance sheet equivalent amount, must be determined according to:
Attachment C to this Prudential Standard for any commitments; and
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;
second, the resulting exposure amount or EAD must be multiplied by the relevant risk weight applicable to the counterparty or exposure type.
For SFTs, including securities lending transactions, an ADI must calculate:
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
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.
Credit risk mitigation
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.
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.
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).
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.
Attachment A — Risk weights for property Attachment A — Risk weights for property exposures
Attachment A – Risk weights for property exposures
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.
Standard property loans Standard property loans
Standard property loans
A loan must meet all of the requirements set out in paragraphs 3 to 7 of this Attachment to be classified as standard.
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.
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:
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;
the ADI must ensure that the amount secured by the first mortgage cannot be increased without being subordinate to the second mortgage;
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
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).
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:
consideration of the impact of higher interest rates on the ability of the borrower to repay;
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;
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
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.
Where 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.
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.
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.
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.
Loan-to-valuation ratio Loan-to-valuation ratio
Loan-to-valuation ratio
The components of LVR must be prudently calculated in accordance with the requirements set out in paragraphs 10 and 11 of this Attachment.
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:
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
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.
When calculating LVR, the loan amount will reduce if the loan amortises.
The value of the property must be appraised independently using prudently conservative criteria, consistent with the requirements set out in APS 220.[5] If a market value can be determined, the valuation must not be higher than the market value.[6] For the purpose of calculating the property value:
the value of the property at origination must be maintained, unless:
an updated valuation is obtained as part of a new loan application process in relation to the mortgaged property;
an event occurs that results in a likely permanent reduction in the property’s value; or
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;
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
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.
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.
Credit risk mitigation Credit risk mitigation
Credit risk mitigation
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.
Residential property Residential property
Residential property
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:
‘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:
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
a part-time residence that is the principal place of residence of the borrower(s).
Where 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.
‘Principal-and-interest’ refers to a loan on which interest is paid and principal is automatically amortised over the life of the loan.
‘Other standard residential property’ refers to any of the following exposures:
loans for a purpose other than owner-occupation, including for investment or business purposes;
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
other loans that do not meet both of the criteria in paragraphs 14(a) and 14(b) of this Attachment.
An ADI may reduce its capital requirement through the application of LMI, where the insurance:
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
is provided by an eligible lenders’ mortgage insurer, which means that:
for the purposes of Level 1 Regulatory Capital, the lenders’ mortgage insurer must be regulated by APRA; and
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.
Risk weights for standard residential pr Risk weights for standard residential property loans
Risk weights for standard residential property loans
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
This is an opening excerpt, not the complete document.