QUANTIFYING BENEFIT ESTIMATES FOR PRUDENTIAL RULE MAKING

Abstract

Quantifying monetary benefits for cost‐benefit analysis can be a difficult task and globally few prudential regulators have been able to substantiate economic benefits using quantified estimates. This paper outlines a model the Australian Prudential Regulation Authority (APRA) is developing to quantify the economic benefits associated with incremental changes to prudential regulations. The model initially calculates the default probabilities and loss estimates using data from APRA's existing internal risk rating system and the default probabilities from external ratings agencies. For any proposed regulatory change the model calculates the change in the risk ratings of the portfolio and the change in loss estimates to arrive at an annual benefit estimate for the rule change. This value is subsequently reduced to take into account APRA's existing effectiveness at remediating entities and the benefit estimate is converted to a net present value.