Digging Deeper Into The Strategic Framework Of APS 220 – A Radical Change For ADIs

An Exploratory Series – Part Two By:

Gavin Pugh, Head of APAC Risk Solutions, AxiomSL
Saumyadeep Datta, Head of APAC Risk Products, AxiomSL


aps 220In Part One of this blog series (Australia’s Prudential Standard APS 220 Brings Big Changes…And Hidden Strategic Benefits For ADIs), we gave a general overview of the expected implications the revised Standard will have on authorized deposit-taking institutions’ (ADIs) credit-risk management and reporting practices. The Australian Prudential Regulation Authority (APRA) is set to finalize its strategic framework in early 2021, with the quarter ending March 31, 2022 targeted as the first reporting period.

In Part Two, we review the various elements of the credit-risk framework based on the draft proposals and consultations culminating with a discussion of the convergence of risk and finance data.

Risk Profiles and Appetites – Boards Must Align and Adjust Annually

With credit risk being the overarching theme of APS 220, APRA is intent on making the classification of credit exposures consistent with updates planned under Basel III – often referred to as ‘Basel IV’. Accordingly, each ADI will be required to align its credit risk appetite and management based on the credit risk profile set by its respective board of directors.

Hence, the board of directors will play a key role in managing the ADI’s risk appetite as it carries out the following functions:

  • Steering the utilization of different forms of financing
  • Determining the geographical operating areas and markets
  • Managing the funding and liquidity

Boards will have to adjust this profile annually to align risk-taking with statutory requirements, strategic business objectives, and capital planning.

Practices and Policies – Framework Overhaul in the Cards

Under APS 220, APRA has indicated that ADIs need to improve their practices related to credit risk management and reporting and be more consistent in implementing their credit policies. It also has stressed the need to prioritize borrowers’ ability to repay loans.

To achieve this, an ADIs credit risk framework must include the following components:

  • End-to-end traceability so that ADIs can assess portfolio underwriting at the loan/contract level.
  • Data transparency (such as drilldown and lineage) that supports auditability and enables ADIs to identify, measure, evaluate, and report credit risk


Definitions – ADIs Must Get Aligned

Another of APRA’s objectives is that regulatory data be aligned across the marketplace. As a result, credit policy definitions will need to be similar among ADIs, irrespective of their size or scope, and be approved by APRA.

From an APRA standpoint, the standards maintained by the Australian Securities and Investments Commission (ASIC) and the Australian Banking Association (ABA) are not sufficient. Therefore, ADIs will have to significantly review and modify their credit policy definitions to meet APS 220 requirements.

Problem Exposures – New Classifications Are Afoot

APRA is planning changes to the classification of problem exposures to make reporting more consistent and more aligned with the Basel Committee on Banking Standard (BCBS). In addition, due to the impact of the COVID-19 pandemic and the Australian government’s response, the deferral of loan repayments may be extended, potentially increasing the number of problem exposures.

It is important to note that the purpose of these classification changes is for ADIs to better monitor exposures within appropriate timeframes, and not compel them to report more exposures.

Prudent Administration – Needs a Data Lens

APRA has highlighted the need for ADIs to have a “robust system for the prompt identification of sources of credit risk” in their portfolios. In essence, it is emphasizing the importance of attaining accurate data in order to make prudent decisions related to credit portfolios. Such a prudent administration system should be based on objective business rules and include a data-driven procedure to identify loss exposures and categorize them into different stages.

Adding to its purview, APRA, through its new APS 220 reporting regime, is placing heightened importance on the explicability of the variations in loss provision numbers period-on-period and scenario-on-scenario.

Achieving such granular-level attribution poses serious challenges for ADIs with limited data at their disposal (or for those that rely on data from their respective head offices) and hence requires ADIs to radically change their approach to portfolio administration by viewing it through a data lens.

Regime Unification – A Marriage of Risk and Finance Data

The current APS 220 comprises credit-risk related data reporting at an aggregated level and is predominantly AASB 9-centric aligning with IFRS 9. The revised APS 220, now combines two regimes:

  • Basel III/IV for credit-risk capital
  • IFRS9’s expected credit loss


In principle, the two regimes are similar, as they are applied to measure the impact of credit risk on an ADI’s books. However, due to the difference in origin and the plethora of treatment variations between the two regimes, IFRS9 ECL has become the source for finance practitioners’ perspective on credit-risk management, whereas Basel III/IV and RWA is the source for risk practitioners.

Under the revised APS 220, the regimes are combined into a single deal-level granular reporting composition and thus APRA is harmonizing the differences in these perspectives. Consequently, ADIs need to change their thought processes radically and move from siloed risk and finance data frameworks to a “convergent – one framework.”

One Framework – But, How to Converge…

APS 220 stands as a harbinger of radical change. The historical model of separating risk and finance functions each with its own silos, business models, and technology applications has forced organizations to stitch together data from disparate, siloed sources in order to meet regulatory reporting requirements. This manually driven, time-consuming, error-prone, and often opaque approach is not sustainable under the demands of APS 220. Furthermore, the costs of continuing to run two separate technology systems, with non-standardized data models and frequent duplication of processes, is no longer prudent.

When considering APS 220, some institutions may be tempted to fall into the trap of building a one-off tactical solution. Although such a move may address the tight timelines, when reviewed from a management perspective, will not stand up to stress tests, reflect the strategic nature of the reporting, nor enable the ADI to derive further value.

Strategic Approach – Delivers Hidden Benefits

In contrast, to move rapidly in a tight timeframe toward a convergent data framework requires a nimble, strategic approach. And – beyond the tumult involved in de-siloing risk and financial data aggregation – ADIs can look forward to the potential benefits they can reap, as demonstrated by the following client outcomes.

  • An ADI found after conducting a deep analysis of its liquidity coverage ratio (LCR) computation carried out by its risk function that it was overreporting the figure. It had used a manual format to converge the risk and finance data in terms of their outputs based on incorrect assumptions. For the analysis, the ADI chose to utilize AxiomSL’s data-driven automated solution to review the data sets, calculations, and assumptions that made it possible to view the risk and finance data holistically. The analysis of the combined data enabled the ADI to make a significant savings in their liquidity buffers of three million Australian dollars.


  • To submit reports to the Prudential Regulation Authority of the United Kingdom, a financial institution undertook a project to reorganize its risk and finance teams into a cohesive unit by merging them into one small team. The change management process, though difficult, was significantly amplified by using AxiomSL’s data-driven automated solution that captured data, cleansed it, and then submitted it for reporting. During a recent RWA process, the firm observed that under the guidance of the combined team, processing time improved by 30% and reporting accuracy also improved significantly.


Radical Change – Pays Dividends

In conclusion, implementing the strategic framework for APS 220 will ultimately lead to greater synergies between ADIs’ risk and finance functions. These synergies will enable ADIs to optimize capital and stimulate business insights. In addition, converging data outputs will result in significant cost efficiencies across the Australian banking sector.

Next in This APS 220 Exploratory Series

In in the final blog of this series, we will discuss how AxiomSL can help ADIs make the necessary changes required to successfully comply with the APS 220 regime.

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

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