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Commonwealth legislation
This Act has been repealed and is no longer in force. It is retained for historical reference.
This instrument revokes the 2017 determination and reissues Prudential Standard APS 111, specifying what counts as regulatory capital and how to measure Level‑1 and Level‑2 capital for authorised deposit‑taking institutions (ADIs) and authorised NOHCs (paras 1–6, 11–14). Boards remain responsible for ensuring capital adequacy.
It requires ADIs to meet detailed form‑and‑substance criteria for capital instruments, maintain valuation and governance controls, supply documentation for new or non‑standard instruments, and consult APRA for departures. APRA may adjust or exclude requirements and can require deductions or reclassification of capital (paras 7, 18, 25–28). ADIs bear the compliance costs; APRA decides eligibility.
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Direct links to the current provisions in Banking (prudential standard) determination No. 3 of 2021.
Sourced from the Federal Register of Legislation (legislation.gov.au), CC BY 4.0.
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Banking (prudential standard) determination No. 3 of 2021
Prudential Standard APS 111 Capital Adequacy: Measurement of Capital
Banking Act 1959
I, John Lonsdale, a delegate of APRA:
(a) under subsection 11AF(3) of the Banking Act 1959 (the Act) REVOKE Banking (prudential standard) determination No. 4 of 2017 including Prudential Standard APS 111 Capital Adequacy: Measurement of Capital made under that Determination; and
(b) under subsection 11AF(1) of the Act DETERMINE Prudential Standard APS 111 Capital Adequacy: Measurement of Capital in the form set out in the attached Schedule, which applies to ADIs and authorised NOHCs to the extent provided in paragraphs 2 to 5 of the Prudential Standard.
This instrument commences on 1 January 2022.
Dated: 16 September 2021
[signed]
John Lonsdale
Deputy Chair
Interpretation
In this instrument:
ADI has the meaning given in section 5 of the Act.
APRA means the Australian Prudential Regulation Authority.
authorised NOHC has the meaning given in section 5 of the Act.
Schedule
Prudential Standard APS 111 Capital Adequacy: Measurement of Capital comprises the document commencing on the following page.
Prudential Standard APS 111
Capital Adequacy: Measurement of Capital
| Objectives and key requirements of this Prudential Standard<br>This Prudential Standard sets out the characteristics that an instrument must have to qualify as Regulatory Capital for an authorised deposit-taking institution and the various regulatory adjustments to be made to determine total Regulatory Capital on both a Level 1 and Level 2 basis.<br>The ultimate responsibility for ensuring that an authorised deposit-taking institution’s Regulatory Capital meets the requirements of this Prudential Standard rests with its Board of directors.<br>The key requirements of this Prudential Standard are that an authorised deposit-taking institution must:<br>include in the appropriate category of Regulatory Capital (i.e. Common Equity Tier 1 Capital, Additional Tier 1 Capital or Tier 2 Capital) only those capital instruments that meet the detailed criteria for that category;ensure all Regulatory Capital instruments are capable of bearing loss on either a ‘going-concern’ basis (Tier 1 Capital) or a ‘gone-concern’ basis (Tier 2 Capital); andmake certain regulatory adjustments to capital, mainly from Common Equity Tier 1 Capital, to determine total Regulatory Capital. |
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Table of Contents
Authority
Application
2. This Prudential Standard applies to all authorised deposit-taking institutions (ADIs), subject to paragraph 3 of this Prudential Standard.
3. This Prudential Standard does not apply to:
(a) a foreign ADI, which must, however, be subject to comparable capital adequacy standards in its home country; or
(b) a purchased payment facility provider (PPF provider).
4. A reference to an ADI in this Prudential Standard, unless otherwise indicated, is a reference to:
(a) an ADI on a Level 1 basis; and
(b) a group of which an ADI is a member on a Level 2 basis.
5. If an ADI to which this Prudential Standard applies is:
(a) the holding company for a group, the ADI must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable; or
(b) a subsidiary of an authorised non-operating holding company (authorised NOHC), the authorised NOHC must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable.
6. This Prudential Standard commences on 1 January 2022.
Adjustments and exclusions
7. APRA may adjust or exclude a specific requirement in this Prudential Standard in relation to an ADI.[1]
Previous exercise of discretion
8. An ADI must contact APRA if it seeks to place reliance, for the purposes of complying with this Prudential Standard, on a previous exemption or other exercise of discretion by APRA under a previous version of this Prudential Standard.
Interpretation
9. Terms that are defined in Prudential Standard APS 001 Definitions appear in bold the first time they are used in this Prudential Standard. Where this Prudential Standard provides for APRA to exercise a power or discretion, this power or discretion is to be exercised in writing. In this Prudential Standard, unless the contrary intention appears, a reference to an Act, Regulations, Prudential Standard, Australian Accounting Standard or Australian Auditing and Assurance Standard is a reference to the instrument as in force from time to time.
Definitions
10. The following definitions are used in this Prudential Standard:
(a) capital instruments – includes all capital instruments eligible to be included in Common Equity Tier 1 Capital, Additional Tier 1 Capital and Tier 2 Capital;
(b) distributable items – means items which are permitted to be distributed in accordance with relevant statutory and regulatory requirements applicable to distributions by the issuer;
(c) loss absorption event – has the meaning in paragraph 2 of Attachment F to this Prudential Standard;
(d) mutual equity interests – capital instruments issued by mutually-owned ADIs that meet the criteria in Attachment I to this Prudential Standard;
(e) mutually-owned ADI – means an ADI that is a ‘mutual entity’ as defined in the Corporations Act;
(f) non-viability event – has the meaning in paragraph 2 of Attachment H to this Prudential Standard;
(g) paid-up instrument – means a capital instrument where:
(i) the payment of the capital has been received with finality by the issuer;
(ii) the capital is reliably valued;
(iii) the capital is fully under the issuer’s control; and
(iv) the instrument does not, directly or indirectly, expose the issuer to the credit risk of an investor;
(h) related entity – means an entity over which an ADI or parent entity of the ADI exercises control or significant influence and can include a parent company, a sister company, a subsidiary or any other affiliate;
(i) TLAC instrument – means an instrument that would be eligible for recognition under the Total Loss Absorbing Capacity standard set out in Principles on Loss-absorbing and Recapitalisation Capacity of G-SIBs in Resolution issued by the Financial Stability Board on 9 November 2015.
Regulatory Capital
11. For the purposes of this Prudential Standard:
(a) a component of capital is any form of capital specified in this Prudential Standard as eligible for inclusion in Regulatory Capital; and
(b) a category of capital is a group of components of capital.
12. Regulatory Capital consists of the following categories:
(a) Tier 1 Capital (going-concern capital[2]), which comprises:
(i) Common Equity Tier 1 Capital;
(ii) Additional Tier 1 Capital; and
(iii) paid-up mutual equity interests issued by a mutually-owned ADI that meet the criteria in paragraph 1 of Attachment I to this Prudential Standard and are above the limit specified in paragraph 4 of Attachment I; and
(b) Tier 2 Capital (gone-concern capital[3]);
that satisfy the criteria set out in this Prudential Standard.
13. Total Capital is the sum of the components of Tier 1 Capital and Tier 2 Capital.
14. An ADI must ensure that any component of capital that the ADI includes in a particular category of Regulatory Capital satisfies, in both form and substance, all requirements in this Prudential Standard for the particular category of Regulatory Capital in which it is included.
15. An ADI must not include an item of capital in a particular category of Regulatory Capital if that item, when considered in conjunction with other related transactions that affect its overall economic substance, could be reasonably considered not to satisfy the requirements of this Prudential Standard for that category of Regulatory Capital.
16. An ADI must ensure that the category of Regulatory Capital in which a component of capital is included, when measured at Level 1 or equivalent, is not upgraded to a higher category of Regulatory Capital when measured in an ADI’s Regulatory Capital at Level 2. Any such component of capital must be reclassified to the appropriate lower category of Regulatory Capital when measured at Level 2.
17. An ADI must not include a capital instrument in a category of Regulatory Capital based on a future event[4], until such time as:
(a) the future event occurs; and
(b) the proceeds have been irrevocably received by the ADI.
18. APRA may require an ADI to:
(a) exclude from its Regulatory Capital any item included as a component of capital that in APRA’s opinion is not a genuine contribution to the financial strength of the ADI; or
(b) reallocate to a lower category of Regulatory Capital any component of capital that in APRA’s opinion does not satisfy the requirements of this Prudential Standard for the category of Regulatory Capital to which it was originally allocated.
19. A capital instrument is not eligible for inclusion in a category of Regulatory Capital if the nature or complexity of its terms, its location of issue, or its structure raises concerns over whether the instrument fully, and unequivocally, satisfies the requirements for the category of Regulatory Capital in this Prudential Standard.
20. An ADI must not include a capital instrument that involves the use of a special purpose vehicle (SPV), or a stapled security structure consisting of the issue of a preference share and a stapled instrument of another form, in its Regulatory Capital.
21. An ADI must not include a capital instrument in its Regulatory Capital if the capital instrument has features that hinder recapitalisation of the ADI, or any other members of the group to which the ADI belongs. This includes features that require the ADI or any other members of the group, to compensate investors if a new instrument is issued at a lower price during a specified timeframe.
22. A capital instrument is not eligible for inclusion in Regulatory Capital if it contains any terms that could inhibit the ADI’s ability to be managed in a sound and prudent manner, particularly in times of financial difficulty, or restrict APRA’s ability in its role as prudential regulator to resolve any problems encountered by the ADI.
23. A capital instrument is not eligible for inclusion in Regulatory Capital if it includes any ‘repackaging’ arrangements that have the effect of compromising the quality of the capital raised.[5]
24. An ADI, or any other member of the group to which the ADI belongs, must not create an expectation at issuance that a capital instrument will be bought back, redeemed or cancelled, and the statutory or contractual terms of the instrument must not include any feature that may give rise to such an expectation. An ADI, or any other members of the group, must not assume, or create market expectations, that supervisory approval will be forthcoming for the ADI or any other members of the group, to buy back, redeem or cancel an instrument.
25. An ADI must provide APRA, as soon as practicable, with copies of documentation associated with the issue of Additional Tier 1 Capital and Tier 2 Capital instruments.
26. Where the terms of a capital instrument depart from established precedent, an ADI must consult with APRA on the eligibility of the instrument for inclusion as a category of the ADI’s Regulatory Capital in advance of the issuance of the instrument, and provide APRA with all information it requires to assess the eligibility of the instrument.
27. As part of the documentation provided for the purposes of paragraphs 25 and 26 of this Prudential Standard, an ADI must include a statement of compliance of the capital instrument signed by a senior manager of the ADI if it is the issuer or, in the case of a capital instrument issued by a non-ADI member of the Level 2 group, signed by a senior manager of the ADI or authorised NOHC with group responsibility. The statement must:
(a) address how the issuer is satisfied that each required capital eligibility criterion set out in this Prudential Standard is met and will continue to be met in the future; and
(b) clearly set out references to supporting documents and opinions that demonstrate that the criteria are met.
28. An ADI must obtain APRA’s approval before the terms of an instrument are altered in a way that may affect its eligibility as Regulatory Capital.
Application of fair values
29. Where an ADI measures its financial instruments at fair value for capital adequacy purposes, and where permitted, for other prudential purposes, it must comply with the requirements in Attachment A to this Prudential Standard.
Common Equity Tier 1 Capital
30. Common Equity Tier 1 Capital comprises the highest quality components of capital that fully satisfy all of the following characteristics:
(a) provide a permanent and unrestricted commitment of funds;
(b) are freely available to absorb losses;
(c) do not impose any unavoidable servicing charge against earnings; and
(d) rank behind the claims of depositors and other creditors in the event of winding-up of the issuer.
31. Common Equity Tier 1 Capital consists of the sum of:
(a) paid-up ordinary shares issued by an ADI (whether listed on an exchange or unlisted) that meet the criteria in Attachment B to this Prudential Standard;
(b) paid-up mutual equity interests issued by a mutually-owned ADI that meet the criteria in paragraph 1 of Attachment I to this Prudential Standard up to the limit specified in paragrap
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