APRA has released an updated Prudential Standard APS 222 to reduce the risk of issues in one part of a corporate group spreading and having a financial or reputationally damaging effect on an authorised deposit-taking institution (ADI).

APS 222 sets out APRA’s requirements for the management of dealings with related entities by authorised deposit-taking institutions (ADIs).

The new standard will include a broader definition of related entities, revised limits on the level of an ADI’s exposure to related entities and minimum requirements for ADIs to assess contagion risk. The standard will come into effect from 1 January 2021.

The broadened definition of related entity of an ADI means an entity which could give rise to a risk to the ADI due to conflicts of interest and contagion, where the risk would not arise if the ADI were dealing with an unrelated entity.

A related entity of an ADI includes, but is not limited to, any of the following:

(i) an entity which is directly or indirectly controlled by the ADI;

(ii) an entity which directly or indirectly controls the ADI;

(iii) a substantial shareholder of the ADI; and

(iv) a related individual of the ADI and the related individual’s relatives.

Where APRA considers it appropriate, APRA may require an ADI to treat an entity as a related entity;

APRA will also require ADIs to regularly assess and report on their exposure to step-in risk – the likelihood that they may need to “step in” to support an entity to which they are not directly related.