Prudential Standard APS 110: Assessment 1

This presentation discusses the key requirements and objectives of Prudential Standard APS 110 for maintaining adequate capital in ADIs. It covers topics such as responsibility for capital management, measurement of capital adequacy, minimum capital adequacy requirements, and the risk-based capital adequacy framework.

ADVANCE DIPLOMA IN
ACCOUNTING

Prudential Standard APS 110
 The key requirements and objectives of prudential standard
are to assist ADI in maintaining adequate capital.
 Serves authorized deposit taking institute by maintain an
adequate capital on both level 2 and level 1.
 ADI according to prudential standard must maintain
required level of regulatory capital. Such institution should
have a process of assessing the capital adequacy internally.
ASSESSMENT 1

 The standard is not applicable to purchased payment
facility provider and foreign ADI.
 As per the standard, it is required by ADI to have an
internal capital adequacy assessment process.

 The integral part of risk management should be capital
management by creating an alignment between risk
profile and risk appetite.
 The financial strength of ADI is determined by its
capital and the operations of institution are supported
by the standard by providing a buffer so that they are
able to absorb unanticipated loss resulting from
activities.
RESPONSIBILITY FOR CAPITAL
MANAGEMENT

 The report of internal capital adequacy assessment
process should include the analysis of actual position of
capital in relation to the action of actual versus planned
capital management and minimum requirements of
regulatory capital (Tam and Clarke 2015).

 It is required by ADI to have an internal process of
assessing the capital adequacy which should be
adequately documented and any significant changes
being made should be approved by the board.
 Such process should have strategy that helps in ensuring
that there is maintenance of adequate capital and
adoption of policies that helps in addressing the material
risk impacting the capital that are not covered by
regulations.
MEASUREMENT OF CAPITAL
ADEQUACY

 For the measurement of capital adequacy, the standard
requires to use a tiered approach that helps in assessing
the financial strength at three levels which ensure
adequate capitalization of ADA (Apra.gov.au 2019).

The minimum prudential capital requirement that should
be maintained by ADI at all time are as follows:
 Tier 1 capital ratio at 6%
 Tier 1 capital ratio for common equity at 4.5%
 A total of capital ratio at 8%.
A higher prudential capital requirement might be
determined by APRA and they can also change such
capital requirement for ADI anytime.
MINIMUM CAPITAL ADEQUACY
REQUIREMENT

Capital adequacy assessment is based on the framework of risk based
capital adequacy which is set out by Basel committee.
 Tier 1 capital ratio= Tier 1 capital/Total assets that are risk weighted
 Tier 1 capital ratio for common equity= Tier 1 capital for common
equity/ Total assets that are risk weighted
 Total capital ratio= Total capital/ Total assets that are risk weighted
 where, the computation of risk weighted assets are done as the sum
of following to the extent to which the prudent standard can be
applied to ADI.
RISK-BASED CAPITAL ADEQUACY FRAMEWORK

Therefore, the key requirements and objectives of
prudential standard are to assist ADI in maintaining
adequate capital.

Apra.gov.au. (2019). [online] Available at:
https://www.apra.gov.au/sites/default/files/150902-
Draft-APS-110-September-2015.pdf [Accessed 16 Apr.
2019].
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