Revisions are aimed at addressing lessons learned from large interest rate movements
The Australian Prudential Regulation Authority (APRA) has finalised revisions to its framework for interest rate risk in the banking book (IRRBB) requirements for authorised deposit-taking institutions (ADIs).
In letters released today, APRA detailed its response to submissions from the December 2023 consultation on IRRBB reforms, issuing the final revised Prudential Standard APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book (APS 117), Reporting Standard ARS 117.0 IRRBB Repricing Analysis Collection (ARS 117.0), and Reporting Standard ARS 117.1 IRRBB Capital Charge Collection (ARS 117.1). These revised standards will be effective from Oct. 1, 2025.
Therese McCarthy Hockey (pictured above), APRA board member, stated that the revisions are aimed at addressing lessons learned from large interest rate movements and last year’s international banking crisis. She noted that APRA’s approach has helped the Australian banking system avoid the issues faced by some overseas banks.
“The revisions to APRA’s standard are designed to create better incentives for ADIs, in particular larger ADIs, in managing their interest rate risk, including raising standards of governance and the measurement of risk, and simplify the IRRBB framework and ensuring a proportionate approach across ADIs,” McCarthy Hockey said in the letter addressed to all authorised deposit-taking institutions.
For smaller ADIs, the changes mainly reaffirm existing risk management requirements, while for larger ADIs, the revisions are designed to reduce volatility and variation in the calculation of the IRRBB capital charge, without significantly increasing capital for the industry overall.
APRA’s consultation process included multiple rounds of engagement with various stakeholders, including ADIs and industry bodies. The final consultation confirmed that all ADIs must manage their material risks, including IRRBB, as required by the existing Prudential Standard CPS 220 Risk Management.
McCarthy Hockey said submissions to the recent consultation were generally supportive, particularly from non-significant financial institutions and that most queries sought clarification on the application of IRRBB modelling requirements for internal ratings-based approach ADIs. APRA addressed these in the final revised APG 117, she added.
APRA also clarified expectations on assumptions for the maturity profile of shareholders’ equity, highlighting the need for senior management to set strategies consistent with IRRBB risk appetite and to regularly report risk and performance to the board.
The final revised APS 117 and APG 117, effective from Oct. 1, 2025, are advised to be considered by ADIs in their ongoing management of IRRBB. Minor drafting changes have been made to the IRRBB capital charge formula to ensure consistency across documents.
The current APS 117 will remain in effect until the new standards take effect, and APRA invites feedback on the transitional measures by Aug. 9, 2024.
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