Australian Prudential Regulation Authority Submission to the Basel Committee on Banking Supervision Credit Risk Modelling: Current Practices and Applications

In Australia, as in most countries, capital adequacy regulation of banks and other regulated deposit-taking institutions is based on guidelines contained in the Committee’s Capital Accord. APRA therefore takes a close interest in the evolution of the Accord and is keen to contribute to its on-going development. In light of rapid advances in methods for measuring and managing risk in recent years (and the consequent pressures that are building on the existing regulatory framework), APRA welcomes the decision to review the Accord and the Committee’s report on credit risk modelling which forms a part of that process. Broadly, we are in favour of searching for more sophisticated approaches for determining regulatory capital requirements that better reflect differences in risk profiles. Such measures offer the potential for more certain capital protection across different institutions and through time, particularly given banks’ growing capacity not only to detect regulatory anomalies but also to act on that information.