APS 112 is APRA's Prudential Standard 'Capital Adequacy: Standardised Approach to Credit Risk'. It requires authorised deposit-taking institutions (ADIs) to hold regulatory capital against credit risk by applying APRA-prescribed risk weights to their on- and off-balance-sheet exposures.

Who does APS 112 apply to?

It applies to ADIs regulated by APRA under the Banking Act 1959 - banks, building societies and credit unions, generally on a consolidated group basis. Non-bank lenders and fintechs are not directly subject to it.

What is the difference between the standardised approach and the IRB approach?

Under the standardised approach in APS 112, risk weights are set by APRA. Under the internal ratings-based (IRB) approach, an accredited ADI uses its own approved models. The standardised approach is the default; only ADIs with APRA accreditation may use IRB for relevant portfolios.

Can ADIs reduce credit risk capital under APS 112?

Yes. APS 112 permits a reduction where an exposure is covered by eligible lenders' mortgage insurance or an eligible credit risk mitigation technique such as qualifying collateral, guarantees or netting, provided the standard's eligibility and operational requirements are met.

Where can I read the official APS 112 standard?

The operative text is on the APRA Prudential Handbook at handbook.apra.gov.au/standard/aps-112, with supporting guidance in APG 112. Always verify the current version and effective date directly with APRA.

APRA APS 112 Standardised Approach to Credit Risk explained

APS 112 explained: how APRA's standardised approach to credit risk sets capital risk weights for Australian ADIs, who it applies to, key rules and common pitfalls.

APS 112 is the APRA prudential standard that sets out how an authorised deposit-taking institution (ADI) measures credit risk for regulatory capital purposes using the *standardised approach*. In plain terms, it tells banks, building societies and credit unions how much capital they must hold against the loans and other exposures on (and off) their balance sheet, by assigning a prescribed risk weight to each exposure. It is one of the core building blocks of the Australian bank capital framework.

The full title is Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk. The primary source is APRA. You can read the standard on the APRA Prudential Handbook and find supporting material on APRA's credit risk page. This article is a neutral summary to help you orient; the standard itself governs.

What APS 112 is

APS 112 requires an ADI to hold sufficient regulatory capital against its credit risk exposures. Credit risk is the risk of loss arising from a counterparty failing to meet its obligations. Rather than letting each institution model that risk from scratch, the standardised approach applies a table of prescribed risk weights set by APRA.

The mechanism is straightforward in concept:

Each on- and off-balance-sheet exposure is allocated to an asset class (for example, residential mortgages, corporate, sovereign, retail, or other ADIs).
A risk weight is applied to that exposure. Risk weights are broadly aligned with the likelihood of counterparty default and the nature of any security.
The risk-weighted amounts are summed to produce risk-weighted assets (RWA) for credit risk, which feeds into the ADI's overall capital ratio.

The standardised approach sits alongside the internal ratings-based (IRB) approach. The standardised approach is the default; larger, more sophisticated ADIs may be accredited by APRA to use IRB models for some portfolios instead.

Who APS 112 applies to

APS 112 applies to ADIs regulated by APRA under the *Banking Act 1959*. That includes banks, building societies and credit unions, and generally extends to the consolidated banking group. ADIs that have APRA accreditation to use the IRB approach apply that approach to the relevant portfolios, but the standardised approach in APS 112 remains the baseline and applies to exposures not covered by accredited models.

If you are not an ADI, APS 112 does not impose obligations on you directly. Non-bank lenders, fintechs and other credit providers are not subject to APRA's ADI capital standards, though they encounter the framework indirectly through funding relationships, warehouse structures and the pricing of exposures held by banks. If your interest is the broader regulatory perimeter for credit and banking products, the financial services topic hub provides wider context.

How the standardised approach works

The defining feature of the standardised approach is that the risk weights are set by APRA rather than derived from an institution's own internal models. This makes outcomes more comparable across institutions and reduces model risk, at the cost of less granularity than IRB.

The standard addresses both on-balance-sheet exposures (such as loans and securities) and off-balance-sheet exposures (such as undrawn commitments, guarantees and certain derivatives). Off-balance-sheet items are typically converted to a credit-equivalent amount using a credit conversion factor before a risk weight is applied.

Residential mortgage lending receives particular attention in the current version of APS 112. Risk weighting for housing exposures is differentiated by features that affect risk, including the loan-to-valuation ratio and whether the loan is for an owner-occupier paying principal and interest or for another purpose such as investment or interest-only lending. The intent is for the capital held to track the underlying riskiness of the loan more closely than earlier, flatter approaches did.

Risk weights and credit risk mitigation

Risk weights vary by asset class and exposure characteristics. The standard sets out the categories and the applicable weights; you should work from the current APS 112 text on APRA's handbook rather than memorised figures, because the weights are detailed and subject to revision.

APS 112 also allows an ADI to *reduce* its credit risk capital requirement where an exposure benefits from recognised protection. Two mechanisms feature prominently:

Eligible lenders' mortgage insurance (LMI) — recognised relief for qualifying insured residential mortgage exposures.
Eligible credit risk mitigation (CRM) — techniques such as eligible collateral, guarantees and netting, where they meet the standard's eligibility and operational requirements.

The relief is only available where the protection genuinely meets APRA's eligibility criteria. Claiming a reduction for an arrangement that does not satisfy those criteria is a common source of error and supervisory attention.

Key timing and the broader capital framework

APS 112 was substantially revised as part of APRA's wider package to strengthen and improve the comparability of the ADI capital framework, often referred to as the "unquestionably strong" capital reforms. The revised standard and its companions form a single, interconnected framework.

Because commencement and transitional arrangements have shifted over the life of the reform package, verify the version and effective date that applies to your institution directly with APRA. Do not rely on a date quoted second-hand. APRA maintains the operative text, the superseded versions and any frequently asked questions on its website.

APS 112 does not operate in isolation. It interacts with the overall capital adequacy standard (APS 110), the definition of capital (APS 111), operational risk capital (APS 115) and market risk requirements, among others. Credit risk capital is one input into the total capital ratio that APS 110 governs. Because the standard requires capital outcomes to be supported by sound systems and oversight, it also intersects with an ADI's broader risk management obligations under CPS 220 Risk Management.

What ADIs need to do

At a practical level, compliance with APS 112 involves:

Correct classification. Map every on- and off-balance-sheet exposure to the right asset class and sub-category, including the residential mortgage segmentation.
Accurate data. Capture the loan-level attributes that drive risk weights, such as loan-to-valuation ratios, repayment type, occupancy and security details.
Sound CRM treatment. Apply LMI and credit risk mitigation only where eligibility and operational requirements are met, and document the basis.
Reliable RWA calculation. Compute risk-weighted assets consistently and feed them into the capital ratio reported to APRA.
Governance and review. Ensure systems, controls and periodic review support the figures, consistent with the institution's risk management framework.

Read APS 112 together with Prudential Practice Guide APG 112, available via the APRA Prudential Handbook. APG 112 is guidance, not binding, but it outlines APRA's expectations and prudent practice.

Common pitfalls

Treating risk weights as static. The weights and categories are detailed and have changed across versions; always work from the current operative standard.
Mis-segmenting housing loans. Getting occupancy, repayment type or LVR wrong understates (or overstates) capital and is readily identifiable in supervisory review.
Over-claiming CRM relief. Recognising collateral, guarantees or LMI that does not meet eligibility criteria is a recurring finding.
Poor data lineage. If the loan-level data feeding the calculation is incomplete or unreliable, the RWA figure cannot be relied upon.
Confusing the approaches. Applying IRB treatment without accreditation, or mixing standardised and IRB inconsistently across a portfolio, is not permitted.

If you are unsure which version applies, what a particular risk weight is, or whether a mitigation technique is eligible, confirm the position against the current standard and, where needed, with APRA directly before acting.