APRA has begun consulting on new prudential standards to strengthen the financial crisis response of banks, insurers and pension fund administrators.
The regulator said the two proposed standards aim to ensure entities are prepared to deal with threats to their viability while reducing
the negative consequences resulting from failure.
Its first proposal, CPS 190 Financial Contingency Planning (CPS 190), would ensure that all APRA-regulated entities have plans in place to respond to severe financial stress.
He said these plans would define the actions an entity would take to restore financial resilience or safely exit the industry, while protecting depositors, policyholders and pension fund members.
Smaller entities will be subject to less onerous requirements, depending on their size, complexity and business models.
Second, Resolution CPS 900 (CPS 900) planning would require large or complex APRA-regulated entities to take preventative measures so that if they fail, APRA can resolve them with limited negative impacts on the community and the financial system.
This includes ensuring that essential financial services can continue to be provided with minimal disruption.
APRA has confirmed that it is also finalizing requirements for the big four banks to maintain additional loss absorbing capacity (LAC).
The purpose of the adjustment is to ensure that, in the unlikely event of bankruptcy, a large bank can be recapitalized using a large pool of private rather than public funds.
Yesterday, APRA wrote to major banks to confirm that the final loss-absorbing capacity adjustment will be an increase in minimum total capital requirements by 4.5 percentage points of risk-weighted assets, to respect from January 2026.
He added that major banks have already made significant progress in meeting this requirement, following the 2018 consultation.
Vice Chairman John Lonsdale said the disorderly failure of an APRA-regulated entity could have a significant impact on the economy and society.
“Crisis preparedness and resolution planning is at the very heart of APRA’s goal of protecting the financial interests of bank depositors, insurance policyholders and pension fund members,” said he explained.
“Although Australia has one of the strongest and most stable financial systems in the world and failures are extremely rare, businesses in any competitive market can face financial difficulties. If this happens, we want to ensure that each entity has the ability to recover, or manage an orderly exit with the least possible impact on the community and the financial system.”
Lonsdale added that APRA-regulated entities have made substantial improvements in emergency planning in recent years.
“However, there remain large capability gaps between entities and across industries. By establishing a consistent, transparent and enforceable framework, APRA will be better able to strengthen crisis preparedness and fill these gaps,” said he concluded.
A five-month consultation on the CPS 190 and CPS 900 is underway.
APRA proposes that the new prudential standards come into effect from January 2024, and one year later for superannuation administrators for CPS 190 only.
It will also consult on supporting guidance material in 2022