APRA APS 111: measuring capital and what counts as eligible capital

APS 111 is the Australian Prudential Regulation Authority (APRA) prudential standard that sets out how an authorised deposit-taking institution (ADI) measures its regulatory capital and what instruments count as eligible capital. In short, it defines the detailed eligibility criteria for each category of capital, the loss-absorbency tests an instrument must meet, and the deductions an ADI must make to arrive at its total regulatory capital. It applies to banks, building societies and credit unions licensed as ADIs in Australia.

If you are searching for "APS 111", you are almost certainly after one of three things: which instruments qualify as Common Equity Tier 1, Additional Tier 1 or Tier 2 capital; what must be deducted from capital; or how APS 111 sits alongside APS 110. This explainer covers all three.

The primary source is Prudential Standard APS 111 Capital Adequacy: Measurement of Capital, made by APRA under the Banking Act 1959. The current revised version commenced on 1 January 2023.

What APS 111 is and who it applies to

APS 111 is a legally binding prudential standard, not guidance. It applies to every ADI authorised under the Banking Act 1959, and in most cases to the relevant Level 1 (the ADI itself) and Level 2 (the consolidated banking group) measurements of capital.

Its purpose is narrow but foundational: to ensure that the capital an ADI reports as "regulatory capital" is genuinely capable of absorbing losses. APRA's overarching concern is that capital be real, permanent and available when an institution is under stress, rather than instruments that look like capital on paper but behave like debt in a crisis.

The standard does this by setting:

• The eligibility criteria for each capital instrument by category
• The loss-absorbency basis each category must satisfy
• The regulatory adjustments (deductions) required to determine net capital
• Rules on how investments in subsidiaries and other entities are treated

How APS 111 fits with APS 110 and the wider framework

APS 111 does not set the minimum amount of capital an ADI must hold. That sits in Prudential Standard APS 110 Capital Adequacy, which establishes the minimum capital ratios and the overall capital adequacy framework.

The relationship is straightforward:

• APS 110 answers *how much* capital is required (the ratios and minimums).
• APS 111 answers *what counts* as capital and *how it is measured* (the numerator of those ratios).

The two are read together with the risk-weighted-asset standards (such as APS 112 for standardised credit risk and APS 113 for the internal ratings-based approach), which determine the denominator. APS 111 is also tightly linked to an ADI's broader risk governance obligations under CPS 220 Risk Management, because the integrity of capital measurement depends on sound controls and accurate reporting.

For wider context on how these prudential standards interact across the sector, see our financial services topic hub.

The three tiers of eligible capital

APS 111 organises eligible capital into a hierarchy, ranked by quality and loss-absorbency:

The key distinction APRA draws is between going-concern capital (Tier 1, which absorbs losses while the institution continues to operate) and gone-concern capital (Tier 2, which absorbs losses if the institution fails or is declared non-viable).

• CET1 is the bedrock. It is principally ordinary shares (or mutual equivalents), retained earnings and certain reserves. It carries no fixed servicing obligation and ranks last in a wind-up, so it absorbs losses first.
• AT1 instruments must be perpetual, with no incentive to redeem, and must include loss-absorbency features (such as conversion to ordinary shares or write-down) triggered at a defined point.
• Tier 2 instruments are typically subordinated, longer-dated and must also be capable of conversion or write-down at the point of non-viability.

An instrument only counts in a category if it meets *all* of the detailed criteria for that category. Failing one criterion can disqualify an instrument entirely.

Capital deductions and the role of CET1

Reporting eligible instruments is only half the exercise. APS 111 also requires ADIs to make a series of regulatory adjustments, most of which are deducted from CET1. This conservative approach ensures the highest-quality capital bears the cost of items that are unreliable as loss absorbers.

Common deductions include:

• Goodwill and other intangible assets
• Certain deferred tax assets
• Defined-benefit superannuation fund surpluses (subject to conditions)
• Specified holdings of the capital instruments of other financial institutions
• Investments in subsidiaries (see below)

Because these deductions reduce CET1 directly, an ADI cannot inflate its capital ratios by holding large volumes of intangibles or cross-holdings. Confirm the precise deduction treatment and any thresholds against the current text of APS 111 before relying on a calculation, as the detail is exacting.

Equity investments in subsidiaries and the removal of SPVs

The revisions that commenced on 1 January 2023 sharpened two areas in particular:

• Equity investments in banking and insurance subsidiaries. APRA changed the capital treatment of an ADI's equity investments in its subsidiaries to reinforce the resilience of the group. The objective is to ensure that capital genuinely available to the parent ADI is not overstated by double-counting capital held within subsidiaries.
• Removal of special purpose vehicles (SPVs). APRA removed the allowance for using SPVs to issue regulatory capital. The aim is simpler, more transparent capital issuance, with instruments issued directly rather than through intermediary structures.

These changes are explained in APRA's response to submissions on the revised APS 111.

What ADIs should do to stay compliant

Practical steps to keep capital measurement defensible:

• Map every capital instrument to its category and test each against the full eligibility criteria, not just the headline features.
• Maintain documentation for each instrument's loss-absorbency mechanics (conversion or write-down terms) so they can withstand APRA scrutiny.
• Apply all deductions systematically, with a clear audit trail from financial statements to the regulatory return.
• Review subsidiary holdings against the current investment-in-subsidiaries treatment.
• Engage APRA early when contemplating a new capital issuance; APRA expects to assess novel instruments before they are counted as regulatory capital.
• Integrate with risk governance so that capital measurement is owned within the framework required by CPS 220 Risk Management.

APRA's measurement of capital FAQs are a useful supplement on practical interpretation.

Common pitfalls

• Treating eligibility as a checklist of major terms. A single non-compliant clause (for example, a redemption incentive in an AT1 instrument) can disqualify the whole instrument.
• Counting instruments before APRA confirmation. New or complex instruments should not be assumed eligible until reviewed.
• Understating deductions. Omitting intangibles, deferred tax assets or cross-holdings overstates CET1 and the capital ratio.
• Stale documentation. Capital terms must reflect the current standard; instruments structured under older rules (including via SPVs) may no longer qualify.
• Reading APS 111 in isolation. It must be read with APS 110 and the risk-weight standards to produce a correct capital ratio.

Always work from the current version of the standard on the APRA website, as APRA revises its capital framework periodically.