Since the last material updates to its prudential framework in 2003, global financial crises and corporate scandals have emphasised the substantial credit and liquidity risks that authorised deposit-taking institutions (“ADIs”) are exposed to when dealing with related entities. APRA has recently released draft Prudential Standard APS 222 (Associations with Related Entities) and draft Reporting Standard ARS 222.0 (Exposures to Related Entities) to reflect some of the lessons learned from these experiences, with a view to stabilising the financial system and clarifying the requirements on measuring contagion risks to ADIs.
The proposed updates, which will impact all ADIs operating in Australia, include updating the:
definition of related entities
measurement of exposures to related entities
prudential limits
extended licensed entity (“ELE”) framework
reporting requirements
Specifically, APRA proposes to revise the prudential limits on exposures to related entities so that they are calculated in relation to Tier 1 Capital. This is particularly significant to ADIs with a small capital base. Further, the proposed changes to the ELE framework are aimed at affecting ADIs with offshore ELE subsidiaries that hold or invest in assets. Tighter exposure limits could affect the ability to undertake certain exposures with these entities, and may require ADIs to restructure their operations or seek external funding for operations currently performed within subsidiaries.
A finalised framework is intended to come into effect on 1 January 2020. Transitional relief may be available to some ADIs.
If you have any questions about APRA’s discussion paper and proposed amendments to the related entities framework or your legal obligations, please contact Richard Beissel or a member of our Financial Services team.