New credit risk management standard released

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

In March, APRA commenced a three-month consultation to revise Prudential Standard APS 220 Credit Quality (APS 220), in a bid to ensure it “reflected contemporary credit risk management practices”. 

According to the regulator, the updated standard also seeks to address recommendation 1.12 from the banking royal commission by amending 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.

Other key revisions to APS 220 include:

• a clarification of the scalable and flexible approach that should be applied to an ADI’s credit assessment in the application of each of the credit standards requirements;
• no longer requiring ADIs to predict when “external events” are likely to occur for valuations of collateral and no longer requiring APRA approval for fair values to be based on highest and best use; and 
• providing a simpler classification for prudential reporting purposes, with the term “significantly deteriorated” removed from the final APS 220, replaced by “performing” or “non-performing”, as well as “past due” and “restructured”.

APRA added that its finalised prudential standard was broadened to include credit standards, consistent with the Australian Securities and Investments Commission’s (ASIC) recent update to its responsible lending guidance (RG 209).

APRA claimed that 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 will come into effect from 1 January 2021.

APRA has also released a draft Prudential Practice Guide APG 220 Credit Risk Management (APG 220) for consultation, which closes on 12 March 2020.

[Related: APRA confirms FHB scheme risk weights]