The Australian Prudential Regulation Authority (APRA) has released the first of a series of discussion papers on the implementation of the new Basel II capital adequacy regime in Australia. The paper deals with the ‘standardised’ approach to credit risk and proposes a new prudential standard in this area.

The major practical impact will be the change in risk-weighting for loans and the point at which mortgage insurance is required.

A key quote:

APRA proposes to introduce a risk-weighting scheme for residential mortgage loans which is based upon the loan-to-valuation ratio (LVR) of a loan, the loan type (whether the loan is a standard or non-standard housing loan) and whether the loan has acceptable mortgage insurance covering a minimum of 40 per cent of the original loan amount. Depending upon these characteristics, a loan may be risk-weighted at 35, 50, 75 or 100 per cent…

This compares to the current arrangements where, in order to qualify for a 50 per cent (concessional) riskweight, a residential mortgage loan must have an LVR of less than 80 per cent (or 60 per cent for a nonstandard loan) or be 100 per cent mortgage insured through an acceptable lenders mortgage insurer.

Most Australian banks, building societies and credit unions are likely to adopt the standardised approach to determine their regulatory capital requirements for credit risk. However, APRA expects larger banks, which in aggregate represent the majority of assets in the industry, to seek accreditation for the more sophisticated Basel II approaches.

APRA has called for comments by 30 September.