APRA APS 110 Capital Adequacy: the framework explained

What APS 110 is, in one minute

Prudential Standard APS 110 Capital Adequacy is the cornerstone prudential standard made by the Australian Prudential Regulation Authority (APRA) that requires an authorised deposit-taking institution (ADI) — a bank, building society or credit union — to hold enough capital to absorb losses and remain solvent through stress. In short, APS 110 sets the overarching requirement: an ADI must maintain capital, on both a Level 1 and Level 2 basis, commensurate with the risks it runs, and must keep its regulatory capital ratios above the minimums APRA requires at all times.

It is the "head" standard in APRA's capital framework. APS 110 itself sets the architecture — the ratios, the buffers, the requirement to run an internal assessment process — while the detailed mechanics of measuring risk-weighted assets (RWA) and eligible capital live in companion standards (APS 111, APS 112, APS 113, APS 116, APS 117 and others).

The primary source is the current text of APS 110 on the APRA website. The version in force commenced on 1 January 2025 (Banking (prudential standard) determination No. 6 of 2024).

Who APS 110 applies to

APS 110 applies to all ADIs authorised under the Banking Act 1959, with two notable carve-outs. It does not apply to:

• Foreign ADIs (branches of overseas banks operating in Australia); and
• Providers of purchased payment facilities (PPF providers).

For a locally incorporated ADI, the obligations bite at the institution itself (Level 1) and across the consolidated banking group (Level 2). The standard makes clear that ultimate responsibility for prudent capital management rests with the ADI's Board of directors — not just the treasury or finance function.

The substance: capital ratios and buffers

At its core, APS 110 requires an ADI to maintain risk-based regulatory capital ratios above its prudential capital requirements (PCRs) at all times. The minimum PCRs are a Common Equity Tier 1 ratio of 4.5%, a Tier 1 ratio of 6.0% and a Total Capital ratio of 8.0% of risk-weighted assets. APRA may determine higher PCRs for an individual ADI and may change them at any time.

Capital is measured against risk-weighted assets and split into tiers of decreasing loss-absorbing quality:

• Common Equity Tier 1 (CET1) — the highest-quality capital (ordinary shares, retained earnings).
• Additional Tier 1 (AT1) — together with CET1 makes up Tier 1 capital.
• Tier 2 — supplementary capital; Tier 1 plus Tier 2 is Total Capital.

On top of the minimum ratios, APS 110 layers capital buffers that must be met with CET1:

• Capital conservation buffer (CCB) — 2.5% of RWA for standardised ADIs and 3.75% for ADIs approved to use the internal ratings-based (IRB) approach. A domestic systemically important bank adds a further 1.0%. Operating within the buffer is permitted but triggers constraints on dividends, discretionary AT1 payments and discretionary staff bonuses, scaled to how far into the buffer the ADI sits.
• Countercyclical capital buffer (CCyB) — a macro-prudential setting APRA can vary between 0 and 3.5% of RWA for the Australian jurisdiction, depending on the financial cycle.

APRA may vary buffer requirements for an ADI or class of ADIs, so check the current settings on the APS 110 page.

Change ahead: AT1 phase-out. On 4 December 2025 APRA finalised changes to phase out Additional Tier 1 capital instruments as eligible regulatory capital. The new framework comes into effect on 1 January 2027, and APRA expects all AT1 issued by banks to be phased out by 2032.

A simplified view of the capital stack:

ICAAP and the Board's role

A defining requirement of APS 110 is that every ADI (and every Level 2 group) must have an Internal Capital Adequacy Assessment Process (ICAAP). The ICAAP is the institution's own framework for:

• identifying and measuring the material risks it faces;
• holding capital commensurate with those risks, including risks not fully captured by the standardised minimums;
• setting internal capital targets above the regulatory floor; and
• stress testing and planning to maintain adequate capital over time, including management actions if capital falls.

The ICAAP must be overseen by the Board and reviewed at least every three years. An ADI must prepare an annual report on the implementation of its ICAAP and give a copy to APRA no later than three months after the end of the period it covers. APRA's expectations for what a sound ICAAP looks like are set out in its prudential practice guidance — see CPG 110 Internal Capital Adequacy Assessment Process and Supervisory Review.

Capital adequacy is one expression of an ADI's broader risk appetite and governance. It sits alongside enterprise risk management obligations under CPS 220 Risk Management and the operational-resilience expectations now drawing significant attention across the financial services sector.

Level 1, Level 2 and how it fits the wider framework

APS 110 requires capital to be assessed at two levels:

• Level 1 — the standalone ADI (and, where relevant, certain subsidiaries consolidated into it under APRA's rules).
• Level 2 — the consolidated banking group of which the ADI is the head or a member.

APS 110 is the entry point to a suite of standards. It sets the ratios and buffers; the companion standards define how the inputs are calculated:

• APS 111 — measurement and quality of capital (what counts as CET1, AT1, Tier 2).
• APS 112 / APS 113 — credit risk capital (standardised and internal ratings-based approaches).
• APS 116 / APS 117 — market risk and interest rate risk in the banking book.
• Operational risk and disclosure standards round out the framework.

The architecture follows the Basel Committee's three-pillar model: minimum requirements (Pillar 1), supervisory review and the ICAAP (Pillar 2), and disclosure (Pillar 3).

What to do to comply

For an ADI, practical compliance with APS 110 means:

• Maintain capital above the PCR plus buffers at all times — not just at reporting dates. Monitor ratios continuously, with early-warning triggers well above the regulatory floor.
• Run a genuine ICAAP — board-approved, regularly updated, with stress testing tied to realistic scenarios and credible management actions.
• Manage distributions carefully — understand the automatic constraints on dividends, AT1 coupons and bonuses that apply when operating within the capital conservation buffer.
• Report accurately and on time — meet the associated reporting standards, give APRA the annual ICAAP report within three months of period end, and seek APRA's approval before any planned reduction in capital.
• Test readiness for adjacent obligations — capital adequacy work increasingly overlaps with operational risk and resilience. The CPS 230 readiness scorer is a useful way to sanity-check how well your operational-resilience controls support the assumptions in your capital and risk frameworks.

Common pitfalls

• Treating APS 110 as a treasury-only exercise. The Board carries ultimate responsibility; a thin or rubber-stamped ICAAP is a recurring supervisory concern.
• Managing to the minimum. APS 110 expects capital comfortably above the PCR; running close to the floor leaves no room for shocks and risks breaching buffers.
• Forgetting the buffer constraints. Paying dividends or AT1 distributions while inside the capital conservation buffer can breach the automatic distribution limits.
• Confusing the levels. Capital must hold up at both Level 1 and Level 2; a group-level position can mask a weak standalone entity.
• Relying on stale figures. Buffer settings, the countercyclical buffer rate and individual PCRs change. Always confirm the current numbers with APRA before acting.