APRA seeks to reduce 'contagion risk'

APRA has released a consultation paper on revisions to the large exposures of authorised deposit-taking institutions (ADIs) that seeks to bring Australia in line with the Basel Committee recommendations.

Under the proposed changes, Australian ADIs will only be permitted to devote 25 per cent of their Tier 1 capital to an unrelated ADI (down from 50 per cent).

"APRA’s large exposure framework aims to limit the impact of losses when a counterparty defaults, and restrict contagion risk from spreading across the financial system," said the regulator.

APRA has also proposed a new limit of 15 per cent of Tier 1 capital to be applied to exposures to banks designated as either a global systemically important bank or a domestic systemically important bank.

The prudential regulator has also released a set of new criteria that will be used to identity a group of connected counterparties and measure large exposure values.

The revised large exposure requirements are intended to come into effect from 1 January 2019, said APRA.

The deadline for written submissions on the proposals is 5 July 2017.

[Related: APRA sets firm eye on bank capital standards]