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13 Jun 2012

Basel III implementation in Australia: Refining regulatory capital criteria and reporting standards

On Friday 8 June 2012, the Australian Prudential Regulation Authority (APRA) released a letter to Australian Deposit-Taking Institutions (ADIs) proposing two amendments to the current draft of APS 111.

Proposal for Australian law to govern

APRA proposes to amend APS 111 to require all instruments to be subject to Australian law before they can qualify as Additional Tier 1 or Tier 2 Capital.

The reason given by APRA for this proposed amendment is to provide greater assurance that any conversion and/or write-off mechanism contained in regulatory capital instruments will be implemented with certainty and within a short timeframe.

The proposed amendment may be of concern to ADIs that raise regulatory capital under offshore programmes governed by foreign laws, particularly given that no transitional arrangements have been proposed by APRA.

Proposed treatment of joint arrangements

Following the introduction of Australian Accounting Standard AASB 11, joint operators are required to be accounted for on a "proportionate consolidation" basis while joint ventures continue to be accounted for using the "equity method". APRA proposes to amend APS 111 to clarify that joint arrangements and joint ventures should be accounted for in the same manner under Basel III (ie. equity accounting treatment). This will result in a full deduction of the equity investment as a regulatory adjustment to capital.

APRA is seeking feedback on both of these proposals by 6 July 2012.

Proposed refinements to APRA's reporting standards

On Friday 8 June 2012 APRA also released for consultation a Discussion Paper and draft Reporting Standards outlining its proposed reporting requirements for implementing the Basel III capital reforms in Australia. The proposals will involve amendments to the existing Reporting Standard ARS 110.0 Capital Adequacy (ARS 110.0) and the associated reporting forms and instructions at both Level 1 and Level 2. In addition APRA is proposing to introduce a new Reporting Standard ARS 111.0 Fair Values (ARS 111.0).

The proposed amendments to the Reporting Standards are largely housekeeping matters reflecting changes to APRA's capital requirements as a result of the adoption of Basel III. Many of these changes are already outlined in APRA's discussion papers of September 2011 and March 2012 dealing with the implementation of Basel III in Australia.

The only proposed amendments to the Reporting Standards which were not outlined in the earlier discussion papers are set out below:

  • As foreshadowed in APRA's November 2011 discussion paper Covered bonds and securitisation matters, APRA proposes that assets held in a covered pool (securing covered bonds) in excess of 8% of the ADI's assets in Australia will be deducted from Common Equity Tier 1 Capital. APRA proposes adding new line items in the Reporting Standards to take into account this adjustment.
  • amendments to the reporting standards to give effect to the proposed capital treatment of joint arrangements referred to above.

APRA is seeking feedback on the Discussion Paper by 3 August 2012. Following its consideration of the submissions received, APRA will issue final reporting standards and reporting forms later in 2012 to come into effect from 1 January 2013. The first quarterly report under the new reporting standards will be due in April 2013 for the period ending 31 March 2013.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.