Risk-based capital adequacy frameworkRisk-based capital adequacy framework

Risk-based capital adequacy framework

1. APRA’s approach to the assessment of an ADI’s capital adequacy is based on the risk-based capital adequacy framework set out in the Basel Committee on Banking Supervision’s publication, International Convergence of Capital Measurement and Capital Standards: A Revised Framework (Basel II Framework).

2. Consistent with the Basel II Framework, the approach provides for a quantitative measure of an ADI’s capital adequacy and focuses on:

(a) the credit risk associated with an ADI’s on-balance sheet and off-balance sheet exposures;

(b) the operational risk associated with an ADI’s banking activities;

(c) the market risk arising from an ADI’s trading activities;

(d) where applicable, the interest rate risk arising from normal financial intermediation, as distinct from trading activities (refer to Prudential Standard APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (APS 117));

(e) the risks associated with securitisation in accordance with Prudential Standard APS 120 Securitisation (APS 120); and

(f) the amount, form and quality of capital held by an ADI to act as a buffer against these and other exposures.

3. Under the risk-based capital adequacy framework, an ADI’s capital adequacy is measured by means of a risk-based capital ratio calculated by dividing its capital base by its total risk-weighted assets. That is:

risk-based capital ratio = capital base

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total risk-weighted assets

4. An ADI’s PCR is the minimum risk-based capital ratio that the ADI must maintain.

5. The definition of capital base, including qualifying criteria for individual components of capital[4] to be included in an ADI’s capital base, is set out in APS 111.

6. An ADI’s total risk-weighted assets is calculated as the sum of:

(a) risk-weighted on-balance sheet and off-balance sheet assets determined in accordance with Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk;

(b) risk-weighted assets determined under APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk;

(c) 12.5 times the sum of the capital charges determined under Prudential Standards APS 114 Capital Adequacy: Standardised Approach to Operational Risk, APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk and APS 116 Capital Adequacy: Market Risk and APS 117; and

(d) risk-weighted assets determined under APS 120