APRA gives early Christmas gift to non-majors

In a letter sent on 16 December to Australian ADIs, the prudential regulator said it is open to banks adopting a staged accreditation – which provides the capacity for them to use accredited IRB models for regulatory capital purposes for some credit portfolios ahead of others – subject to criteria set out by APRA.

“As a practical matter, stage accreditation will require that all key aspects of IRB systems should be in place at the time of initial accreditation, albeit they may be operationally immature for some portfolios,” Charles Littrell, executive general manager of APRA’s supervisory support division, said.

“In such cases, stage accreditation would allow an applicant ADI time to bed down (and demonstrate sufficient maturity) in the relevant portfolios.”

In order to meet its criteria, APRA expects that a bank seeking to take advantage of staged accreditation would be able to submit a single page application covering all portfolios, and demonstrate the following at the time of initial accreditation for any yet-to-be-accredited portfolios:

• models and risk estimates that have been accepted by APRA;
• models and risk estimates that have been implemented, which also includes a requirement that all exposures have been rated based on the latest models under IRB standard credit risk management control processes;
• a validation and control framework that encompasses both quantitative and qualitative aspects of ratings, and that ratings processes are in place;
• at least two quarters of parallel run have been completed;
• at least one cycle of annual validation and control processes applied to the latest models and estimates have been completed; and
• clear and achievable project timelines for closing outstanding ‘gaps’ are in place.

Furthermore, APRA is prepared to consider, subject to conditions outlined by the regulator, that a bank be accredited to use the IRB approach for credit risk without an accredited advanced measurement approach (AMA) model for operational risk.

“If APRA accepts that an ADI may apply for IRB accreditation but may use the standardised approach to calculate its regulatory capital requirement for operational risk, the ADI will nevertheless be required to demonstrate advanced risk management practices across all its material risks (including operational risk),” Mr Littrell said.

“APRA believes this approach appropriately balances the need to preserve the high standards required for accreditation with the recognition of the different characteristics of individual ADIs.”

In the context of staged IRB accreditation, Mr Littrell said APRA would expect operational risk management to be at an advanced level at the time of initial accreditation.

In a recent article published by the Australian Financial Review, Christopher Joye wrote that APRA’s embrace of the Financial System Inquiry’s recommendation to fast-track "standardised" banks is a big deal for the likes of Bank of Queensland, Bendigo & Adelaide Bank, Suncorp Metway, and eventually ME Bank, “which will be able to compete with the majors and Macquarie on similar capital, leverage, price and return terms”.

“It should ultimately mean that we get a much more efficient financial system that is less reliant on four too-big-to-fail oligopolists, which is a positive for consumers who will benefit from cheaper prices and taxpayers who have less anti-competitive “moral hazard” to worry about,” he wrote.

[Related: Securitisation changes ‘would benefit smaller banks’]