To: Locally incorporated authorised deposit-taking institutions (ADIs)
Supervisors internationally remain mindful of challenges in provisioning in the current macro-economic environment, and in particular ensuring that provisioning estimates adequately capture credit risk in portfolios given model and data limitations.
APRA is writing to all locally incorporated ADIs that do not apply prescribed provisioning under Prudential Standard APS 220 Credit Risk Management (APS 220) to outline observations on provisioning practices. This is consistent with APRA’s strategic initiative to Modernise the prudential architecture, providing timely updates on expectations to respond to risks as they emerge.
Observations on provisioning practices
APRA has set out below observations on the application of expected credit loss (ECL) provisioning. Similar observations have been highlighted and reinforced in the Basel Committee on Banking Supervision (BCBS) newsletter on credit risk issues published in July 2023.1 APRA encourages the subject ADIs to reflect on their provisioning practices in light of this letter and the BCBS publication.2
APRA has recently engaged with a range of ADIs and auditors…
