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

The Australian Prudential Regulation Authority (APRA) released a consultation paper proposing changes to make the internal ratings-based (IRB) accreditation process simpler, clearer and more transparent, with the aim of making IRB access more achievable for a cohort of medium-sized banks while maintaining existing prudential standards. The IRB approach is one of two methods banks can use to calculate credit risk-weighted assets, which drive regulatory capital requirements for credit risk. Most banks use the standardised approach, while six of the largest banks are currently accredited for IRB use (the four major banks, Macquarie Bank and ING Bank Australia). APRA noted that IRB accreditation can marginally reduce capital requirements but has historically required a level of risk management sophistication that has been too resource-intensive for most banks; medium-sized banks have indicated IRB access could help them compete more effectively with the largest banks, particularly in home lending. The proposed changes are set out in the consultation paper titled "A new pathway to internal ratings-based accreditation."