The regulator also consults on a prudential practice guide
APRA has announced updated measures aimed at reinforcing banks’ abilities to manage the impact of interest rate changes on their financial health.
The move comes in response to the November 2022 consultation and entails revisions to the Prudential Standard APS 117 - Interest Rate Risk in the Banking Book (IRRBB).
The key objectives of the updated requirements include:
- reducing volatility in the IRRBB capital charge, especially for larger banks, by addressing concerns related to the treatment of embedded gains and losses and refining the observation period for the capital charge methodology
- creating better incentives for banks to proactively manage their IRRBB risk, including raising governance and risk measurement standards
- simplifying and streamlining the IRRBB framework
Under APS 117, significant financial institutions are mandated to implement a robust risk management and governance framework to navigate the impact of changing interest rates. Larger and more complex banks are also required to hold capital against this risk.
APRA has initiated a brief consultation on select aspects of APS 117, which are also pertinent to smaller banks.
APRA’s proposals reaffirm that all banks, irrespective of size, must manage their material risks, including IRRBB, commensurate with their nature, scale, and complexity. Failure to do so may result in additional regulatory capital requirements under APS 117.
Therese McCarthy Hockey (pictured above), APRA member, said these changes are part of a broader strategy in response to the global banking challenges witnessed earlier in the year. She noted that managing interest rate risk is crucial, as seen in the collapse of several US banks.
“Australia is the only country in the world that mandates provisions for interest rate risk as a core capital requirement,” Hockey said in a media release. “The new and proposed changes incorporate lessons learned from the recent large interest rate movements and overseas bank failures and will further strengthen the resilience of the banking system to potential instability.
“Importantly, these changes should impose little financial or regulatory impost; for larger banks, we have calibrated the framework to ensure the revisions won’t result in a material increase in the IRRBB capital charge; and for smaller banks, the proposed changes principally reaffirm our expectations that all banks need to manage their material risks, including IRRBB.”
Following a three-month consultation period, APRA plans to finalize APS 117 by mid-next year, with the updated standard scheduled to take effect from October 1, 2025.
Concurrently APRA has initiated consultation on a prudential practice guide (APG 117) and reporting standards and guidance accompanying the revised prudential standard APS 117. These are available at: Revisions to the capital framework for authorised deposit-taking institutions.
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