Australia’s APRA Prudential Standard APS 220 Brings Big Changes… And Hidden Strategic Benefits For ADIs

An Exploratory Series – Part One By:

Gavin Pugh, Head of APAC Risk Solutions, AxiomSL
Su Jean Song, Head of Product Management, FinReg ANZ, AxiomSL


In a strong embrace of Basel guidelines, the Australian Prudential Regulation Authority (APRA) is moving forward with planned revisions to its Prudential Standard APS 220. The recently announced proposed revisions are not unexpected. Nevertheless, authorized deposit-taking institutions (ADI) are concerned about what lies ahead – implementing the required changes will be a significant undertaking.

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Credit Risk Management Best Practices On the Horizon…

The overarching theme of APRA Prudential Standard APS 220 is credit risk. With APS 220, APRA intends to make the classification of credit exposures consistent with the updates planned under Basel III – often referred to as ‘Basel IV’. It requires ADIs to set a strategy that reflects their credit risk appetite and profile and maintain policies and processes for controlling or mitigating credit risk over the full credit lifecycle. And the Standard covers other areas including managing problem exposures, maintaining appropriate risk practices, reporting quarterly credit risk-weighted assets (RWA), and provisioning.


…With Daunting Implications For ADIs

APRA kicked off consultations to reflect on evolving credit practices and Basel IV reforms in March 2019. Initially, it intended the revisions to take effect on July 1, 2020. But with the onset of the Covid-19 pandemic, the start date was pushed back to accommodate the effects of the crisis and incorporate industry feedback. The reform implementation APRA now proposes targets the quarter ending March 31, 2022 as the first reporting period.

The implications of implementing the proposed revisions to APRA Prudential Standard APS 220 are daunting. To change their practices related to credit risk management and reporting, ADIs will be compelled to:

  • Collect larger volumes of data
  • Increase data granularity
  • De-silo risk and financial data aggregation
  • Automate data-entry systems


So, What Is APRA’s Overall Agenda?

With evolving economies and changing environments, APRA and its peers globally have been seeking new ways to access data that can help them better support several key objectives including to:

  • More effectively formulate and maintain policy standards
  • Stay current with changing trends in policymaking and global benchmarking
  • Achieve greater transparency and accountability by sharing data among government agencies

They are aggressively addressing these objectives by investing in technology and data collection facilities and by imposing more stringent reporting on financial institutions, including requiring them to submit more granular data.


Regulators Are Modernizing Technology And Data Collection

The data that regulators desire is difficult to obtain and access without the support of advanced technology. Target data has been sparse, often scattered across multiple platforms, and lacks uniform metadata standards and consistent user interfaces. Until recently, regulators’ ability to address their data collection and management needs has been constrained by legacy technology issues.

Today, however, regulators globally are gearing up their technology capabilities so that they can access and share the more granular data they seek.


APRA Connect: On-Trend Technology

A prime example of the modernization movement is the APRA Connect data collection initiative. This platform will not only accommodate APRA’s strategy to collect much larger volumes of data, it will also motivate ADIs to modernize their data readiness and submission practices.

APRA is on trend with many of its global peers who are also capitalizing on automation and data storage technology advances through investments in systems that can handle large volumes of granular data. Examples of similar initiatives include:

  • Bank of England – Transforming data collection review
  • Monetary Authority of Singapore – Data Collection Gateway
  • Hong Kong Monetary Authority – Granular Data Repository (GDR) pilot

It is fortuitous that these initiatives are coming to fruition now as regulators grapple with a new data influx related to pandemic crisis-driven measures. APRA, for example, is leveraging the large quantities of loan data required under its new granular data-cube request approach to review and publicly disclose the impact on the Australian economy of extensive Covid-19 precipitated loan-repayment deferrals.


More Data, More Granularity

As regulators request more granular information in their submissions – whether form-based or data-model based – they intend to achieve several high-level objectives, including:

  • Aligning with international accounting and other standards
  • Protecting smaller financial institutions from regulatory overburden
  • Promoting more prudent data practices
  • Levelling the playing field among financial institutions



The APRA Example

We can see these regulatory intentions being carried out already – APRA Prudential Standard APS 220 is:

  • Bringing loan classifications (performing, significantly deteriorated, and non-performing) in line with the Australian Accounting Standard AASB9
  • Giving ADIs relief by allowing them to apply predetermined factors when assessing their loans
  • Encouraging ADIs to capture deal-level exposures and granular impairment processes
  • Creating a more consistent risk approach by changing capital ratios to allow ADIs to risk-weight loans using the standardized approach

Lastly, the proposed effective date for APRA Prudential Standard APS 220 aligns with the APRA Connect facility going live.


Breaking New Ground – A Powerful Data Combination

Potentially the most impactful new requirement in APRA Prudential Standard APS 220 is the consolidation of finance (provisioning) and risk (RWA) data at the deal level. With this move, APRA is effectively creating a powerful new data combination.

Regulators’ previous attempts to tie risk data to financial data at a granular level rather than at aggregated levels have not advanced far due to the variety of reasons mentioned earlier. But a key barrier has always been that ADIs typically ring-fence their finance, risk, and related functions and systems. Now motivated by APS 220 requirements, ADIs will have do the detailed work to break down some traditional silos and consolidate these formerly disparate datasets. This will result in greater transparency and make it easier for regulators and ADIs alike to identify potential risks.

APRA is paving the way for regulators to pool different types of data to create critical mass and use it to formulate more meaningful and actionable insight. Indeed, early adopters may well inspire other regulators in the Asia-Pacific region to follow suit. For example, similarities exist between APRA Prudential Standard APS 220 and the HKMA GDR pilot. Whereas GDR more focuses on detailed components of the risk such as the valuer of the collateral and the collateral governing law, APRA takes it one step further by asking for credit RWA.

Furthermore, in keeping with this overall regulatory direction, new alignments of other previously disassociated data may also be on the horizon. The global interest in Environmental, Social, and Governance (ESG) mandates is an example whereby regulators could conceivably combine ESG-related data with existing financial and risk data to develop new required risk indicators.


Hidden Strategic Benefits for ADIs…

By following the regulators’ lead, ADIs can get ready for APS 220 compliance on time and benefit from using their combined, granular credit data to inform strategic business policymaking.

From a data perspective, preparing for APS 220 enables ADIs to position themselves to manage their long-term regulatory reporting data on a single, transparent platform such as AxiomSL’s ControllerView®. From an insight perspective, enabling typically siloed functions to collaborate easily and use the same data will result, in greater transparency. Organizations will be able to eliminate the dreaded ‘analysis paralysis’ and ‘black-box’ syndromes that inhibit efficient well-informed regulatory management and business decision-making.


…Or, How You Can Capitalize On Preparing For APRA Prudential Standard APS 220

ADIs implementing APS 220 in a data-driven, technology-forward manner stand to reap many benefits from the greater granularity of data required.

Consider the business impacts that arise when your organization can:

  • Optimize capital allocation across the balance sheet, resulting in greater capital savings across risk types
  • Boost decision-making power from a best-practice perspective
  • Elevate the importance of stress testing, which makes it possible to develop a view of risk appetite using a bottom-up approach, rather than one that is top-down
  • Increase stability by setting larger capital buffers, which, in turn, make the banking sector more resilient during times of economic uncertainty
  • More easily identify and manage problem exposures, including non-performing and restructured exposures and other transactions
  • Effectively review the general reserve for credit losses (GRCL) and determine appropriate adjustments or reutilization based on AASB9 accounting standards, which became effective on January 1, 2018


Next In This Exploratory Series

To continue the discussion, in Part Two, we will unpack how ADIs can capitalize on their work for APS 220, digging deeper into the strategic framework ADIs will need to manage granular data and credit risk calculations across functions effectively and efficiently.

In the meantime, please feel free to contact us here to have a conversation about your APRA Prudential Standard APS 220 implementation or to subscribe to email notifications on Part Two and Three of the series.

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