APRA sets timeline for IRRBB changes

John Kavanagh

The Australian Prudential Regulation Authority is aiming to finalise changes to interest rate risk management rules by the end of June and implement them in October next year, the regulator said in an update yesterday.

APRA flagged changes to prudential standard APS 117 Interest Rate Risk in the Banking Book last year, as part of its response to bank failures in the United States and Europe earlier in the year. 

Under APS 117, banks that are classified as significant financial institutions must have an appropriate risk management and governance framework to manage the impact of changing interest rates on their businesses. Larger and more complex banks are required to hold capital against this risk.

The revisions to be finalised by June include a change to the treatment of embedded gains and losses in the IRRBB capital charge, so that banks will have to notify APRA where the embedded gain or loss component is material and explain how the bank is mitigating risks associated with these changes. 

Other changes will affect earnings offsets, the banking book profile and observation frequency.

And the regulator plans to extend certain requirements of the standard to non-significant financial institutions.

Other changes under consideration in response to last year’s bank failures include tighter liquidity standards and modifications to the design features of additional tier 1 securities.

In a change to liquidity standards, APRA proposed that bank bills, certificates of deposit and debt securities issued by other ADIs no longer be counted as eligible liquid assets for a large number of banks.

The changes would have the biggest impact on ADIs that are subject to minimum liquidity holding rules, rather than banks using the liquidity coverage ratio regime.

Mutual banks, credit unions and some small banks operate under the MLH regime, while the big banks, regionals and foreign banks operate under LCR rules.

Under the current rules the value of liquid assets can be included in banks’ accounts at amortised cost rather than market value. APRA said unrealised losses can result in a weaker liquidity position than assumed.

The revisions would ensure that ADIs on MLH value liquid assets at their market value. Unrealised losses would be deducted from capital for all ADIs.

AT1 capital changes under consideration include restricting retail investor access to hybrids, changing distribution and loss absorbency rules and reducing the level of hybrid capital in a bank’s minimum regulatory capital.

In yesterday’s update, APRA said it aimed to complete consultation on liquidity standards in the first half of the year and then conduct a comprehensive review of the standard.

It said it would also undertake formal consultation on proposed changes to regulatory capital rules affecting additional tier 1 securities, but did not set out a timeline.