APRA directs all Australian banks to:
a. Obtain security for all their loans. b. Assign a risk weighting for all their loans. c. Assign an LVR to all their loans. d. All of the listed options are correct.
The correct answer and explanation is:
The correct answer is b. Assign a risk weighting for all their loans.
Explanation:
The Australian Prudential Regulation Authority (APRA) is the regulator for the financial services sector in Australia. One of its roles is to ensure that banks maintain financial stability and sound risk management practices. APRA uses various regulations and guidelines to monitor and control the level of risk banks take on, ensuring that they are capable of absorbing losses without threatening the stability of the financial system.
Risk weighting is a fundamental part of this oversight. APRA requires Australian banks to assign a risk weighting to all their loans. Risk weighting refers to the process of categorizing loans based on their risk level. These weightings are used to determine the capital reserves banks must hold to cover potential losses. For example, loans to highly stable borrowers or secured by valuable assets like real estate may have lower risk weightings, while unsecured loans or loans to borrowers with poor credit histories may have higher risk weightings.
The reason this is important is that it allows APRA to ensure that banks have adequate capital to protect against losses, reducing the likelihood of financial instability. By assigning risk weightings to loans, banks are encouraged to manage their portfolios carefully and ensure they are not overexposed to high-risk loans that could cause significant losses if borrowers default.
The other options listed, such as obtaining security or assigning a loan-to-value ratio (LVR), may be part of a bank’s internal risk management practices, but they are not mandatory requirements set by APRA in the same way risk weightings are. Therefore, the correct answer is b. Assign a risk weighting for all their loans.