Australian Prudential Regulation Authority consults on a streamlined accreditation pathway for banks to use the internal ratings-based approach

The Australian Prudential Regulation Authority (APRA) has published a consultation paper proposing a simpler, clearer and more streamlined pathway for banks to become accredited to use the internal ratings-based (IRB) approach to calculating credit risk-weighted assets, with the aim of making IRB accreditation more accessible to a cohort of mid-sized banks. The IRB approach is one of two methods banks can use to calculate risk-weighted assets, which in turn determines regulatory capital requirements for credit risk. Most banks use the standardised approach, while APRA has accredited six large banks to use IRB (the four major banks, Macquarie Bank and ING Bank Australia). APRA notes that IRB can marginally reduce capital requirements but has historically been too resource-intensive for most banks due to the sophistication expected in risk management; the proposals are intended to improve the flexibility and transparency of the accreditation process without lowering standards, and follow interest expressed by some medium-sized banks and a commitment made through the Council of Financial Regulators’ and Australian Competition and Consumer Commission’s Review into Small and Medium-sized Banks. APRA is seeking feedback on the proposed changes through the consultation paper, “A new pathway to internal ratings-based accreditation.”