APRA has released for consultation draft Prudential Practice Guide CPG 110 Internal Capital Adequacy Assessment Process and supervisory review (CPG 110).

The Guide is part of APRA’s increasing emphasis on capital risk management as Basel III approaches commencement on 1 January 2013. (see here)

UPDATE 1 October: APRA has released a final set of prudential standards and reporting standards that give effect to major elements of the Basel III capital reforms in Australia.

The Guide supports compliance with Prudential Standard APS 110 Capital Adequacy (APS 110) which sets out requirements in relation to the capital adequacy of a regulated institution, including the need for a regulated institution to have an Internal Capital Adequacy Assessment Process (ICAAP), and establish a framework for supervisory review and adjustment of a regulated institution’s capital requirements.

Under the capital standards, the Board of a regulated institution has primary responsibility for the capital management of that institution. This obligation goes beyond the need to ensure compliance with regulatory capital requirements and requires the Board to ensure that each regulated institution holds capital resources commensurate with its risk profile.

Consistent with that overarching responsibility, the capital standards require each regulated institution to have an ICAAP that has been approved by its Board.

The Board is responsible for the risk appetite of a regulated institution and for ensuring that the institution has an appropriate risk management framework. Risk appetite is a fundamental part of both risk management and capital management.

APRA has not yet decided on the form of capital instruments that mutual ADIs can issue to comply with Basel III Common Equity Tier 1.