APRA Updates Prudential Standard on Credit Risk Management

The revised prudential standard on credit risk management will come into effect from 1 January 2021, six months later than was proposed in a March consultation.

16 April 2020 – The revised prudential standard on credit risk management (APS 220) was deferred by one year to 1 January 2022.

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

The update follows a three-month consultation commenced in March to modernise the prudential standard on credit quality (APS 220) and to ensure it reflected contemporary credit risk management practices.

The consultation paper proposed changes to credit risk management practices, including in relation to credit standards and the ongoing monitoring and management of an ADI’s credit portfolios over the full credit life-cycle. It also included changes to asset classification and provisioning norms to take into account updated BCBS (Basel Committee on Banking Supervision) guidance on credit-related matters and recent changes in accounting standards.

The proposed update also sought to address a Royal Commission recommendation to require independent valuation of collateral, and 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.

Submissions were broadly supportive of APRA’s proposals, the regulator said in its response to submissions, available here.

“However, a number of submissions sought clarification of the role of the Board and senior management in credit risk management and the application of the proposed credit standards requirements for certain types of lending,” the letter said. “Respondents also raised concerns regarding the proposed valuation of collateral and asset classification requirements.”

In response to the feedback, APRA has made the following adjustments:

  • credit standards – to clarify 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, whereby an ADI must use “experienced credit judgement” in adopting such an approach to its credit risk assessment of a borrower.
  • valuation of collateral – to clarify that valuation of collateral requirements do not require an ADI to predict when ‘external events’ are likely to occur, and that ‘external events’ are wider than drought and flood. To align with international valuation and accounting standards, the final APS 220 no longer requires APRA approval for fair values to be based on highest and best use.
  • asset classification – to simplify classification for prudential reporting purposes, the term ‘significantly deteriorated’ has been removed from the final APS 220. ADIs will be required to classify exposures as ‘performing’ or ‘non-performing’ and as ‘past-due’ and ‘restructured’. The proposal for a twelve month period for a restructured exposure to return to performing status has been removed in favour of retaining the current six month requirement.

APRA says the finalised prudential standard has also broadened its coverage to include credit standards, consistent with ASIC’s recent update to its responsible lending guidance, and the ongoing monitoring and management of an ADI’s credit portfolio in more detail.

The updated standard 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 Credit Risk Management, available here, will come into effect from 1 January 2021 (six months later than the consultation had proposed).

APRA has also released a draft prudential practice guide on credit risk management for consultation, intended to complement the prudential standard. The draft practice guide APG 220 Credit Risk Management, available here, is open for comment until 12 March 2020.

APRA will separately consult on revised reporting requirements for credit risk management that will take effect at the same time as the final APS 220 and APG 220.

To Top
Share via
Copy link
Powered by Social Snap