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How APRA's reduced real estate revaluation requirement is providing capital and operational relief.

Earlier in March this year, APRA revised the implementation schedule of Basel III reforms in Australia to support of banks grappling with the heightened volume of enquiries from customers seeking loan repayment deferrals. The prudential regulator’s decision came against the backdrop of the postponement announced a few days earlier by the Basel Committee on Banking Supervision (BCBS) with the participating member nations following suit in their respective jurisdictions.

To learn more about all of the major announcements by APRA in response to COVID-19, please read our previous article here.

As a follow-up release on prior announcements, APRA also published a list of FAQs on its website, broadly addressing the industry’s inquiries pertaining to the series of changes announced on capital treatments in response to the COVID-19 global pandemic.

Notably, the regulator has already extended the preferential capital treatment during loan deferral period from 6 to a total of 10 months or 31st March 2021, whichever occurs first. APRA, in its letter to the industry, on 9th of July 2020, has clarified that the extension, after the initial non-repayment period of three months, can only be granted after conducting a thorough assessment of borrower’s serviceability.

The regulator has also asked banks to apply discretionary judgement while assessing the relaxation requirements based on individual circumstances of the borrower i.e. rather than adopting repayment deferments as an all-encompassing solution, banks may, as alternative, also consider loan restructuring or changing repayment type to interest only from principal & interest repayment schedule. Furthermore, where borrowers are assessed to be in a position to restart loan repayments, APRA requires banks to encourage them to do so, as soon as the initial loan deferral period of three months comes to an end. The regulator has also urged the industry to not stray away from their responsible lending obligations in their endeavours to assist borrowers facing hardships.

One of the other highlights of the FAQ publication is the granted relaxation with regards to the revaluation requirement of real estate properties for the purpose of capital calculations. In this article, we will dive deeper into the announcements from APRA around mortgage revaluation requirements and their implications on the operational efficiencies of the banking industry.

Residential property revaluation requirements

While the capital relief during the loan deferral period applies to the entire loan book of the banks, APRA has also extended further support to banks on their residential mortgage secured portfolios by discontinuing the revaluation requirement of the underlying property. With the residential real estate prices experiencing downward pressure in the face of the pandemic, the removal of the mandatory revaluation requirement under APS 112 Capital Adequacy: Standardised Approach to Credit Risk has brought in much needed certainty going into the capital allocations against deferred loans for the banks.

Before the removal of the condition, ADIs were under obligation to revalue the residential mortgage as soon as the lenders became aware of the material changes in property prices in the regions where mortgage loans have been written.

Previously, as per Attachment C of the prudential standard (snapshot below); all else being equal, the capital required against falling prices