Sept 2000
Prudential Standard
APS 110 – Capital Adequacy
Index
Objective
Principles
• Overview
• Minimum Capital Adequacy Requirements
• Responsibility for Capital Management
• Reductions in Capital
• Reporting
Related Guidance Notes
AGN 110.1 – Consolidated Group
AGN 110.2 – Measurement of Capital Adequacy
AGN 110.3 – Minimum Capital Adequacy Requirements
AGN 110.4 – Reductions in Capital
i
Sept 2000
Prudential Standard
APS 110 - Capital Adequacy
Objective
This standard aims to ensure that all locally incorporated ADIs maintain a
level of capital that is consistent with the risks to which they are exposed from
their activities.
This standard outlines the overall framework adopted by APRA for assessing
an ADI’s capital adequacy. It should be read in conjunction with other
associated capital adequacy standards: APS 111 – Capital Adequacy:
Measurement of Capital; APS 112 – Capital Adequacy: Credit Risk; and APS
113 – Capital Adequacy: Market Risk. These associated standards deal with
individual components within the capital adequacy framework.
Index
Principles
Overview
1.
Capital is the cornerstone of an ADI’s strength. It provides a buffer to
absorb unanticipated losses from an ADI’s activities and, in the event of
problems, enables the ADI to continue operating while those problems are
addressed or resolved. The maintenance of adequate capital reserves by
an ADI can engender confidence in the financial soundness and stability
of the ADI by providing continued assurance that the ADI will continue
to honour its obligations to depositors and creditors.
2.
APRA requires an ADI to maintain a level of capital that is adequate for
the type of activities it undertakes. To this end, APRA adopts a riskbased approach to the measurement of an ADI’s capital adequacy on both
a stand-alone and consolidated group basis (see AGN 110.1).
3.
The capital adequacy framework applies to all locally incorporated ADIs
on both a stand-alone and consolidated group basis. Reference to “an
APS 110 – 1
Sept 2000
ADI” or “ADIs” includes an ADI on a stand-alone basis and the
consolidated group, unless otherwise indicated.
4.
Consistent with the Basel Capital Adequacy Framework, the approach
used by APRA for assessing an ADI’s capital adequacy focuses on three
main elements:
(a)
the credit risk associated with an ADI’s on- and off-balance sheet
exposures (see APS 112 – Capital Adequacy: Credit Risk);
(b)
the market risk arising from an ADI’s trading activities (see APS
113 – Capital Adequacy: Market Risk); and
(c)
the form and quality of capital held by the ADI to support these
exposures (see APS 111 – Capital Adequacy: Measurement of
Capital).
APRA may adjust its risk-based capital adequacy framework in future to
take account of developments to the Basel framework. Further elements
or other types of risk may be added to this quantitative framework over
time, such as the inclusion of a requirement to provide capital to cover
operational risk.
5.
Foreign ADIs1 operating through branches in Australia are not subject to
this Standard. They must, however, be subject to comparable capital
adequacy standards in their home country.
Index
Minimum Capital Adequacy Requirements
6.
APRA requires all locally incorporated ADIs to maintain a risk-based
capital ratio of at least 8 per cent at all times, calculated by dividing its
eligible capital base by its total risk-weighted exposures (see AGN 110.2).
At least half of the ratio must take the form of Tier 1 capital i.e. each ADI
must also maintain a minimum ratio of eligible Tier 1 capital to total riskweighted exposures of 4 per cent. (For guidance on the measurement of
Tier 1 and Tier 2 capital, see APS 111 – Capital Adequacy: Measurement
of Capital.)
7.
APRA will consider other risk factors that have not been incorporated or
accounted for quantitatively in the framework when assessing the overall
1
For the purpose of this Standard, foreign ADI has the same interpretation as in Division 1B of the
Banking Act 1959.
APS 110 – 2
Sept 2000
capital adequacy of an ADI. Where it is judged appropriate, APRA will
require individual ADIs to maintain a minimum capital ratio above 8 per
cent (see AGN 110.3).
Index
Responsibility for Capital Management
8.
Beyond the minimum levels of capital specified by this and the associated
set of capital adequacy standards, it is the responsibility of the board of
directors and management of an ADI to make regular assessment of the
ADI’s capital adequacy to ensure that its capital resources are appropriate
to the level and nature of all the risks to which the ADI is exposed.
9.
An ADI should have suitable systems in place to identify, measure and
manage the risks associated with its activities, and to hold capital
commensurate with its overall risk profile. As part of the process, the
ADI should maintain and implement capital management plans setting out
its overall strategy for managing capital resources over time. The capital
management plan should be consistent with the ADI’s overall business
plan and should include actions and procedures for monitoring
compliance with the required minimum capital ratio (including the
corresponding minimum Tier 1 capital ratio). Trigger ratios should be set
to alert management of, and avert, potential breaches to the minimum
capital ratios.
Index
Reductions in Capital
10. Where a locally incorporated ADI proposes any reduction in its capital, it
must obtain APRA’s prior written consent (see AGN 110.4).
Index
Reporting
11. All locally incorporated ADIs must provide APRA each quarter (or more
frequently if required by APRA) with Capital Adequacy Returns on both
a stand-alone and consolidated group basis, as appropriate.
Index
APS 110 – 3