APRA modernises prudential standard on banking credit risk management

The Australian Prudential Regulation Authority (APRA) has released an updated prudential standard on credit risk management requirements for authorised deposit-taking institutions (ADIs).

APRA commenced a three-month consultation in March this year to modernise Prudential Standard APS 220 Credit Quality (APS 220), and ensure it reflected contemporary credit risk management practices. Credit risk refers to the possibility that a borrower will fail to meet their obligations to repay a loan, and is usually considered the single largest risk facing an ADI. Submissions were broadly supportive of APRA’s proposals.

Importantly, the updated standard also addresses recommendation 1.12 from the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. As recommended by the Royal Commission, APRA has amended APS 220 to require independent valuation of collateral, for the valuation to take into account the time taken for realisation of collateral and, to the extent possible, the likelihood of external events, such as drought and flood.

In a response to submissions paper released today, APRA confirmed the finalised prudential standard has broadened its coverage to include credit standards, consistent with ASIC’s recent update to its responsible lending guidance, and the ongoing monitoring and management of an ADI’s credit portfolio in more detail. It also incorporates enhanced board oversight of credit risk and the need for ADIs to maintain prudent credit risk practices over the entire credit life-cycle.

The revised APS 220 also provides a more consistent classification of credit exposures, by aligning recent accounting standard changes on loan provisioning requirements, as well as other guidance on credit related matters of the Basel Committee on Banking Supervision.

As flagged, APRA has renamed the standard APS 220 Credit Risk Management.

The revised APS 220 will come into effect from 1 January 2021.

APRA has also today released a draft Prudential Practice Guide APG 220 Credit Risk Management (APG 220) for consultation. The draft guide is intended to complement the prudential standard. A three-month consultation closes on 12 March 2020.

The response to submissions paper, updated APS 220 and draft APG 220 are available on the APRA website at: Proposed revisions to the credit risk management framework for authorised deposit-taking institutions.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6.5 trillion in assets for Australian depositors, policyholders and superannuation fund members.

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