APRA strengthens rules to combat banking contagion risks

The Australian Prudential Regulation Authority (APRA) has updated the Prudential Standard APS 222 Associations with Related Entities (APS 222) to further reduce the risk of problems in one part of a corporate group having detrimental impact on an authorised deposit-taking institution (ADI).

The new APS 222 changes would come into effect 1 January, 2021 and APRA had confirmed it would be updated to include:

  • a broader definition of related entities that included board directors and substantial shareholders; 
  • revised limits on the extent to which ADIs can be exposed to related entities;
  • minimum requirements for ADIs to assess contagion risk; and
  • removing the eligibility of ADIs’ overseas subsidiaries to be regulated under APRA’s Extended Licensed Entity framework.

APRA had received submissions from 10 stakeholders to its consultation with most supported updating the requirements, although some raised concerns about the complexity of implementing some of those changes.

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John Lonsdale, APRA deputy chair, said they began consulting last July on those proposed changes to incorporate lessons learned from the Global Financial Crisis (GFC).

“As we saw during the global financial crisis, deficiencies in governance or internal controls in one part of a corporate group can quickly spread and cause financial or reputational damage to an ADI,” Lonsdale said.

“Furthermore, complex group structures could potentially make it difficult for APRA to resolve an ADI quickly and protect depositors’ savings in the unlikely event of a bank failure.

“By updating and strengthening the requirements of APS 222, APRA will ensure ADIs are better able to monitor, manage and control contagion risk within their organisations.”

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