Banks and other deposit takers are facing tighter capital rules and wider reporting obligations under APRA's proposed reforms of its related entity monitoring regime.  In a wide-ranging overhaul announced on Monday, the prudential regulator plans to reduce the exposure limits that Australian deposit takers can have to related ADIs and other subsidiaries.Under the changes, a licensed bank will be required to limit its exposure to a related ADI to 25 per cent of Tier 1 capital.Banking groups will also be required to limit their exposures to all related ADIs to 75 per cent of Tier 1 capital.These reforms tighten existing capital rules that allow a bank to hold an exposure to subsidiary ADIs up to 150 per cent of its total capital base.The main effect of these reforms is they will act as a disincentive for Australian banks to maintain a banking presence in offshore markets.APRA acknowledged that its proposed framework could reduce the ability of local banks to compete as deposit takers in offshore jurisdictions.In the last 18 months ANZ and CBA have been exiting activities in Asian markets, particularly in retail banking, insurance and funds management.APRA wants to unwind its existing extended licensed entity framework (ELE) partly because it has found that Australian banks are exploiting the system to exceed the limits on intra-group exposures."The growth in the number of ELE subsidiaries suggests that the ELE framework is not being used on an exceptions basis for efficiency purposes," the regulator argues in its discussion paper."Over time, the growth in the number and size of ELE subsidiaries has also led to a significant increase in the complexity of some ADIs."In APRA's view this has hindered APRA's ability to effectively supervise the ADI and assess its soundness as a stand-alone legal entity."The new regime will also introduce a wider definition of the types of people and stakeholders considered to be "related entities".Perhaps the most significant change will be the inclusion of substantial shareholders of banks in the new definition."The new definition requires ADIs to treat a substantial shareholder, and the substantial shareholder's associates, as a related entity," APRA states in the discussion paper."This, and other components of the expanded definition, ensures that all entities which expose the ADI to conflicts of interest and potential contagion are appropriately captured."The expanded definition of related entities excludes the members of credit unions and mutual banks.It also excludes custodian banks that might hold shares in an ADI on behalf of external counterparties.