## 1ausea2019001

## Source details

**Canonical URL:** [1ausea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1ausea2019001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/1ausea2019001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/1ausea2019001.pdf.json)

---

### Sector structure and systemic importance
- Four large banks hold approximately 77 percent of total banking assets.
- Financial sector composition: 83 commercial banks (59 percent of financial assets) and pension funds (27 percent).
- Total financial sector assets: about 400 percent of GDP.
- Four largest banks designated as domestic systemically important banks (D-SIBs).

### Capital, liquidity, asset quality, and funding
- Banks’ total regulatory capital ratio: 14.7 percent (CET1 ratio of 10.6 percent) as of end-2017 against the requirement of 8 percent (excluding the capital conservation buffer of 3.5 percent for the D-SIBs and 2.5 percent for other banks).
- D-SIBs subject to a 1 percent surcharge (part of capital conservation buffer of 3.5 percent).
- Banking sector profitability: high in global terms but has declined in recent years.
- Average nonperforming loans (NPLs): one percent.
- Residential mortgages form over half of bank lending.
- Banks’ dependence on wholesale funding: about one-third of total liabilities; nearly two-thirds of that is from international sources.

### Legal and institutional enhancements
- Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 (CMA) confers new powers on APRA covering: resolution powers, conglomerate powers, statutory management, directions powers, transfer powers, conversion and write-off of capital instruments, stays, foreign branches, the Financial Claims Scheme (FCS), wind-up, and resolution planning.
- APRA has begun translating new powers into prudential standards and internal work processes.

### Recovery and resolution planning — progress and gaps
- Recovery planning coverage:
  - Began 2011 for six largest banks.
  - Extended to 12 medium-sized banks in 2013 and later to three key service providers.
  - Total ADIs with full recovery plans: 21, representing about 90 percent of banking sector assets.
  - APRA requested proportionate recovery plans from 81 ADIs; 60 submitted by the time of the report, remainder due by end-2018.
  - APRA plans to extend recovery planning to foreign-owned ADI subsidiaries and branches.
- Operational testing and guidance:
  - APRA advises ADIs to conduct regular (at least annual) tests and training exercises focusing on internal escalation, crisis management team functioning, and communication plans.
  - APRA participated in banks’ stress testing to assess links between stress tests and recovery plans.
  - APRA concluded a thematic review and benchmarking exercise of recovery plans submitted by larger banks and provided entity-specific feedback; revised submissions planned on an annual cycle.
- Gaps and recommendations:
  - Need to better integrate recovery planning within risk management and operational testing.
  - APRA should develop a guiding framework for a set of triggers and early warning indicators to highlight when recovery options might need activation.
  - Extend recovery planning requirements to financial conglomerates and group-level planning.
  - APRA to develop a detailed set of data requirements for banks’ assets to enable swift asset valuations for solvency and viability assessments in resolution (Time: ST; Priority: H).

### Operational readiness and cross-border coordination
- Resolution tools untested in Australia; mechanics for bridge bank and asset separation tools are established but financing modalities remain to be established.
- Recommended continuation of intra- and cross-institutional crisis simulation tests; simulate broad, severe scenarios periodically (e.g., biennial) and targeted simulations more frequently.
- Authorities should enhance cooperation with New Zealand regulators via the Trans-Tasman Council on Banking Supervision (TTBC) by advancing from generic resolution issues to specific bank-level resolution plans.
- Consider introducing statutory recognition of actions taken by foreign regulators; current CMA does not contain statutory recognition of foreign regulator actions.

### Loss-absorbing capacity (LAC), bail-in, and funding arrangements
- Priority to increase LAC in the form of contractual bail-in instruments.
- Resolution authority should be able, upon entry into resolution, to convert or write-down contingent convertible or contractual bail-in instruments whose terms had not been triggered prior to entry into resolution (Key Attributes 3.5).
- Introduction of statutory bail-in powers would significantly enhance the resolution regime.
- Workability concerns:
  - Current AT1 and T2 frameworks: AT1 widely held by domestic retail investors complicates bail-in implementation.
  - Recommendation to protect retail investors: robust disclosure of risks, sufficiently high minimum lot sizes, or prohibiting sale of certain instruments to the mass retail market.
- Fiscal backstop and operational modalities:
  - FSSSA: A$20 billion standing budgetary appropriation for financial crisis management purposes; goals include protecting depositors and financial system stability, but FSSSA goals overlap with broadened FCS mandate creating ambiguity.
  - Recommend clarifying goals and operational modalities of FSSSA and establishing principles for recovering funds spent on resolution (e.g., priority claim on rump ADI; levy on financial industry to cover shortfalls).
- Bank levy:
  - Recently introduced bank levy currently paid into general revenue by only the five largest ADIs; could be converted to support an ex-ante funded resolution fund.
  - Recommendation: convert bank levy to build a dedicated resolution fund or support an ex-ante funded deposit insurance scheme.

### Emergency Liquidity Assistance (ELA) and central bank facilities
- RBA liquidity operations:
  - RBA provides liquidity via open market operations (OMOs), standing facilities and a Committed Liquidity Facility (CLF).
  - CLF announced late-2011 to assist ADIs in meeting Liquidity Coverage Requirements (LCR); allows self-securitization and repo access subject to fee and collateral eligibility; RBA may seek APRA confirmation as condition precedent to CLF repo utilization.
  - RBA has no reserve requirements for ADIs.
- ELA recommendations:
  - RBA encouraged to formalize the ELA framework and draw up clearly defined conditions.
  - RBA could provide liquidity support on an uncollateralized basis to a solvent entity with a government indemnity in systemic situations, discussed with CFR agencies.
  - ELA framework should include modalities for conducting solvency assessments and assurance from APRA (move from point-in-time to forward-looking viability assessments), obtaining government indemnity, guidance on lending to an undercapitalized bank in recovery or resolution, requirement that all ELA be collateralized, and applicable risk control measures for lending beyond the CLF.
  - RBA, CFR and Treasury should run simulation tests including process for obtaining a government indemnity.

### Institutional framework: mandates, CFR, and APRA organization
- Four main agencies: APRA, RBA, Treasurer/Minister for Finance (and Treasury), and ASIC.
- CFR (Council of Financial Regulators):
  - Chaired by Governor of the RBA; members include RBA, Treasury, APRA and ASIC.
  - Provides high-level coordination, non-binding advice, meets four scheduled times per year and ad hoc as necessary.
  - Established Crisis Management Working Group (CMWG) meeting every three weeks; CFR FMI Crisis Management Working Group covers FMI issues.
- APRA:
  - Lead resolution authority for ADIs, insurers and superannuation industry (other than self-managed funds).
  - Administers payouts under the FCS.
  - Statutory duty to balance financial safety and efficiency, competition, contestability and competitive neutrality and promote financial system stability.
  - Internal organization:
    - Aligned crisis management functions into a Resolution and Enforcement Unit (R&E) with approximately 25 staff.
    - Maintains a Financial Crisis Management Plan.
    - Recommendation: strengthen R&E by assigning dedicated legal experts rather than outsourcing to APRA’s legal department.
- Decision-making and escalation:
  - APRA uses PAIRS (Probability and Impact Rating System) and SOARS (Supervisory Oversight and Response System) for risk-based supervision.
  - Escalation bodies: Escalation and Enforcement Committee (EEC) chaired by R&E General Manager (advisory, maintains watchlist) and APRA Financial Crisis Management Team (FCMT) convened under severe conditions to decide critical steps including resolution.

### Direction, statutory management, business transfer and winding-up powers
- Direction powers:
  - CMA enhances APRA’s direction powers, including extending directions to subsidiaries of NOHCs, “catch-all” directions, recapitalization directions to NOHCs and certain holding companies, and directions to facilitate resolution.
- Statutory management:
  - APRA may appoint a statutory manager without court approval; statutory manager can assume all powers of the ADI’s board and senior management.
  - CMA extended statutory management to authorized NOHCs and domestically incorporated subsidiaries and added triggers for foreign ADIs (application for external administration abroad or appointment of external administrator abroad).
  - No statutory manager has been appointed to an ADI in Australia to date.
- Business transfer powers:
  - Financial Sector (Transfer and Restructure) Act 1999 allows APRA to transfer assets and liabilities to another ADI or bridge bank, and to compulsorily transfer non-regulated business.
  - CMA clarifies transfer powers to operate even absent relevant State/Territory legislation and allows transfer of shares.
- Winding-up:
  - Winding-up of an ADI governed by Corporations Act; APRA may apply for winding-up under Banking Act or Corporations Act.
  - CMA broadened APRA’s role in liquidation, including applying to Court for directions and for orders to wind up an ADI if insolvent and not restorable to solvency within a reasonable period without first appointing a statutory manager.

### Resolution safeguards and valuation/compensation framework
- Resolution safeguard principles:
  - Respect hierarchy of claims with flexibility to depart from pari passu treatment.
  - “No creditor worse off than in liquidation” principle and ex post monetary compensation where parties are worse off.
  - Appeal rights and judicial review with compensation for misuse of powers.
- Gaps in Australia:
  - No ‘no creditor worse off’ framework in current legislation.
  - Methodology for calculating compensation, providers of compensation and mechanisms to challenge determinations should be introduced.

### Deposit Insurance (Financial Claims Scheme, FCS)
- FCS is ex post funded, backed by a standing budgetary appropriation.
- Payout financing:
  - Initially financed by Government standing appropriation of A$20 billion per failed ADI; additional funds subject to parliamentary approval.
  - APRA administers scheme and recovers payments and expenses from assets of failed bank; shortfalls can be recovered via an ex post industry levy under Financial Claims Scheme (ADIs) Levy Act 2008.
- Coverage:
  - Covers deposits per depositor per ADI up to A$250,000.
  - A$250,000 level fully covers nearly 97 percent of total deposit account holders and approximately 48 percent of deposits by value as of end-2017.
  - Total ADI deposits in Australia: A$1.9 trillion.
  - Four largest banks: A$1.5 trillion.
  - Other Australian banks (excluding foreign subsidiaries): A$246 billion.
- Operational readiness:
  - APS 910 requires ADIs to implement Single Customer View and ensures banks’ systems/processes for payout; testing schedule developed and cross-agency crisis exercise carried out; dedicated FCS website launched in 2016.
  - APRA has tested ADIs’ readiness to prepare SCVs and transmit payment files to the RBA; further work may be needed to meet emerging best practice for deposit payout deadline of seven days.
- Funding model assessment:
  - 2012 FSAP recommended re-evaluating ex-ante funding; 2014 FSI recommended retaining ex post model; government retained ex post funding.
  - IMF recommendation: move from ex post funded FCS to ex ante funded scheme collecting premiums from ADIs; rationale includes Deposit Insurance Core Principles and Key Attributes and concerns about moral hazard from government-funded scheme.

### Cross-border coordination and Trans-Tasman issues
- New Zealand exposure:
  - New Zealand market represents 12.7 percent of total assets of the four major Australian banks and about 85 percent of assets of the New Zealand market.
  - Each of the four largest Australian ADIs has a wholly-owned subsidiary in New Zealand; two have substantial branches.
- Institutional arrangements:
  - Trans-Tasman Council on Banking Supervision (TTBC) established 2005; a 2010 Memorandum of Cooperation sets high-level objectives for trans-Tasman bank distress and burden sharing.
- SPE vs MPE approaches:
  - SPE (Single Point of Entry) generally preferred by Australian authorities; RBNZ focused on stand-alone subsidiary resolution and bail-in (MPE).
  - No consensus yet between Australia and New Zealand on resolution modalities.
- Recommendations:
  - Further bank-specific discussions and simulation exercises on funding modalities and legal structuring for funds flowing via parent to subsidiary.
  - Expand supervisory MOUs to explicitly cover resolution and crisis management and set out information-sharing processes before and during a crisis.

### Key recommendations and priorities (selected entries from executive summary)
- Continue work on resolution plans and resolvability assessments for systemic and mid-sized banks. Within 1 to 2 years complete first draft resolution plans for the major banks. Update and review annually. — Time: C; Priority: H
- Strengthen the independence of the resolution authority. — Time: MT; Priority: H
- Require annual testing of recovery plans from D-SIBs and medium-sized banks. — Time: C; Priority: H
- Extend recovery planning requirements to conglomerates. — Time: ST; Priority: M
- Operationalize new legislated payment modalities for the FCS for transferring covered deposits under a P&A transaction, including arrangements for competitive bidding process. — Time: ST; Priority: H
- Continue working on contingency planning for systemic crisis, including broad and severe simulation exercises and assessing specific resolution options for D-SIBs to minimize potential taxpayer losses. — Time: C; Priority: H
- Ensure adequate loss absorbency and recapitalization capacity of D-SIBs and introduce statutory powers. — Time: ST; Priority: H
- Retail investors’ exposure to complex LAC instruments should be subject to robust safeguards. — Time: ST; Priority: H
- Clarify the role and operational modalities of the FSSSA, including details for recovering funds spent on bank resolution. — Time: ST; Priority: M
- RBA to formalize its ELA framework with clearly defined preconditions and terms. — Time: ST; Priority: H
- Move to pre-funded deposit insurance scheme, to comply with best international practice. — Time: MT; Priority: M
- Exclude insider deposits from FCS coverage. — Time: MT; Priority: M
- Advance mutual understanding between Australia and New Zealand resolution authorities on specific cross-border bank resolution modalities. — Time: ST; Priority: H
- Introduce statutory recognition of action taken by foreign regulators and mechanisms for recognition and enforcement of out-of-court resolution decisions. — Time: MT; Priority: M
- Introduce “no creditor worse off” concept into bank resolution framework with methodology for calculating compensation and mechanisms to challenge determinations. — Time: MT; Priority: M
- Remove national depositor preference provision. — Time: MT; Priority: H

*Source: EXECUTIVE SUMMARY and selected chapters — Technical Note on Australia: Bank Resolution and Crisis Management (IMF).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Sector structure and systemic importance
- The Australian banking sector is highly concentrated and dominated by four large banks, which together hold approximately 77 percent of total banking assets.
- The financial sector in Australia is dominated by 83 commercial banks (59 percent of financial assets) and pension funds (27 percent), with total financial sector assets of about 400 percent of GDP.
- The four largest banks, with largely similar business models, have been designated as domestic systemically important banks (D-SIBs) in Australia.

### Capital, liquidity, asset quality, and funding
- Banks’ total regulatory capital ratio is 14.7 percent (CET1 ratio of 10.6 percent) as of end-2017 against the requirement of 8 percent (excluding the capital conservation buffer of 3.5 percent for the D-SIBs and 2.5 percent for other banks).
- D-SIBs are subject to a 1 percent surcharge, which is part of their capital conservation buffer of 3.5 percent.
- Banking sector profitability remains high in global terms, although it has declined in recent years.
- Average nonperforming Loans (NPLs) of only one percent.
- Residential mortgages form over half of bank lending.
- Banks’ dependence on wholesale funding is about one-third of total liabilities, of which nearly two-thirds is from international sources.

### Legal and institutional enhancements
- The Financial Sector Legislation Amendment (Crisis Resolution Powers and Other Measures) Act 2018 (CMA) confers new powers on the Australian Prudential Regulation Authority (APRA) to resolve financial institutions and strengthens APRA powers regarding conglomerate groups, statutory management, directions powers, transfer powers, conversion and write-off of capital instruments, stays, foreign branches, the Financial Claims Scheme, wind-up, and resolution planning.
- APRA has started to translate the new powers into prudential standards and internal work processes.

### Recovery and resolution planning — progress and gaps
- APRA has extended recovery planning requirements from large to medium sized and smaller banks and provided guidance on recovery planning, including advising banks to conduct regular tests focusing on internal escalation processes, functioning of crisis management teams, and determination of communication plans.
- APRA concluded a thematic review and benchmarking exercise of recovery plans submitted by the larger banks, provided entity-specific feedback, and asked for revised submissions it plans to update on an annual cycle.
- APRA plans to extend recovery planning work to include foreign-owned subsidiaries and branches.
- There is a need to better integrate recovery planning within the risk management framework and operational testing exercises.
- APRA should develop a guiding framework for a set of triggers and early warning indicators to highlight when recovery options might need to be activated.
- APRA’s pilot resolution planning project and resolvability assessment should feed into a framework for establishing credible resolution plans, including group-wide planning for financial conglomerates.

### Operational readiness and cross-border coordination
- Mechanics for bridge bank and asset separation tools are established, but modalities to finance relevant operations remain to be established.
- Resolution tools are untested in Australia; recommended continuation of intra- and cross-institutional crisis simulation tests.
- Authorities should enhance cooperation with New Zealand regulators within the Trans-Tasman Council on Banking Supervision by advancing from generic resolution issues to specific resolution plans.
- Consider introducing statutory recognition of actions taken by foreign regulators.

### Loss-absorbing capacity, bail-in, and funding arrangements
- Ongoing work to increase loss absorbing capacity in the form of contractual bail-in instruments is important.
- The resolution authority should be able, upon entry into resolution, to convert or write-down any contingent convertible or contractual bail-in instruments whose terms had not been triggered prior to entry into resolution (Key Attributes 3.5.).
- Introduction of statutory bail-in powers in the legislation would significantly enhance the resolution regime.
- Authorities should introduce an ex-ante funded deposit insurance scheme, based on best international practice.
- Clarify goals and operational modalities of the Financial System Stability Special Account (FSSSA).
- The recently introduced bank levy could be more closely tied to the resolution framework by converting it to support an ex-ante funded resolution fund.

### Emergency Liquidity Assistance (ELA)
- The Reserve Bank of Australia (RBA) is encouraged to formalize the Emergency Liquidity Assistance framework and draw up clearly defined conditions for it.
- The RBA could provide liquidity support on an uncollateralized basis to a solvent entity with a government indemnity.
- The ELA framework should include modalities for conducting solvency assessments and assurance from APRA (moving from point-in-time assessment to a forward-looking assessment of viability), obtaining a government indemnity, and guidance on lending to an undercapitalized bank in recovery or resolution.
- The framework should require all ELA to be collateralized and consider applicable risk control measures for lending to banks beyond the CLF.

### Historical context and scope
- This Technical Note builds upon findings in the 2012 FSAP Technical Note, which concluded that much had been achieved since the 2008–09 global financial crisis. Since then, authorities have made further progress in crisis management work, including via legislative initiatives and internal crisis preparedness, albeit not all recommendations have been adopted.

### Key recommendations (Table 1 highlights)
- Continue work on resolution plans and resolvability assessments for systemic and mid-sized banks. Within 1 to 2 years complete first draft resolution plans for the major banks. Update and review annually. — Time: C; Priority: H
- Strengthen the independence of the resolution authority. — Time: MT; Priority: H
- Require annual testing of recovery plans from D-SIBs and medium-sized banks. — Time: C; Priority: H
- Extend recovery planning requirements to conglomerates. — Time: ST; Priority: M
- Operationalize the new legislated payment modalities provided for the FCS for transferring covered deposits under a P&A transaction (either with a commercial bank or with a bridge bank), including arrangements for competitive bidding process. — Time: ST; Priority: H
- Continue working on contingency planning for systemic crisis, including via broad and severe simulations exercises and assessing specific resolution options for D-SIBs with a goal to minimize potential losses for taxpayers. — Time: C; Priority: H
- Ensure adequate loss absorbency and recapitalization capacity of D-SIBs and introduce statutory powers. — Time: ST; Priority: H
- Retail investors’ exposure to complex LAC instruments should be subject to robust safeguards. — Time: ST; Priority: H
- As part of resolution planning, APRA to develop a detailed set of data requirements for banks’ assets based on which it could undertake appropriate asset valuations for solvency and viability assessment purposes in a resolution. — Time: ST; Priority: H
- Clarify the role and the operational modalities of the FSSSA, including the details for recovering the funds spent on bank resolution. — Time: ST; Priority: M
- RBA to formalize its ELA framework with clearly defined preconditions for ELA and drawn up terms and conditionalities. — Time: ST; Priority: H
- Move to pre-funded deposit insurance scheme, to comply with best international practice. — Time: MT; Priority: M
- Exclude insider deposits from FCS coverage. — Time: MT; Priority: M
- Advance mutual understanding between the Australia and New Zealand resolution authorities on specific cross-border bank resolution modalities. — Time: ST; Priority: H
- Introduce statutory recognition of action taken by foreign regulators, including the recognition and enforcement of out-of-court resolution decisions taken by foreign authorities; take steps to enhance cross-border coordination arrangements and recovery actions with other jurisdictions. — Time: MT; Priority: M
- Introduce “no creditor worse off” concept into bank resolution framework. Methodology for calculating compensation, who provides compensation, and what mechanisms exist for challenging any determination as to the amount of compensation payable should be also introduced. — Time: MT; Priority: M
- Remove the national depositor preference provision (in which depositors in the home jurisdiction have priority over depositors in a foreign branch of a failed bank). — Time: MT; Priority: H

*Source: EXECUTIVE SUMMARY — Technical Note on Australia: Bank Resolution and Crisis Management (IMF).*

### 7.      The Australian financial sector institutional framework primarily comprises four agencies

### 7.      The Australian financial sector institutional framework primarily comprises four agencies

### Mandates and allocations of power across the four agencies
- APRA
  - Established by the Australian Prudential Regulation Authority Act 1998.
  - Responsible for prudential regulation and supervision of authorized deposit-taking institutions (ADIs), life and general insurance companies (including reinsurers and friendly societies) and the superannuation (retirement savings) industry (other than self-managed superannuation funds).
  - Lead resolution authority for those sectors in Australia with a wide range of enforcement and crisis management powers to deal with institutions engaging in unsafe and unsound practices, including certain related entities, and in some cases anyone who deals with a regulated entity or its related entities.
  - Administers payouts under the FCS in respect of ADIs and general insurers.
  - Statutory duty to balance financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, promote financial system stability in Australia.
  - Pursuant to the Banking Act, duty to exercise powers and functions for the protection of depositors and for the promotion of financial system stability in Australia; entitled to manage or respond to circumstances in which the ability of an ADI to meet its obligations may be threatened.
- RBA
  - Performs traditional central bank functions, including conducting monetary policy operations and serving as the lender of last resort, as well as Financial Market Infrastructure (FMI) oversight.
  - Role in mitigating the risk of financial disturbances that may have systemic consequences, and in responding to a financial system disturbance.
  - Responsible for oversight of FMIs and for advising the relevant Ministers on developments in relation to FMIs.
- Treasurer and Minister for Finance
  - Responsible for the use of public funds and guarantees in ADI resolution and crisis management.
  - Treasurer vested with powers to approve actions that could potentially put public funds at risk.
  - Treasurer’s consent required for activation of the FCS and the Financial System Stability Special Account (FSSSA), which also requires the approval of the Finance Minister.
  - Treasurer’s consent required for APRA to direct a failing ADI to transfer its business to a healthy institution (which could trigger compensation requirements for certain property holders under the Australian Constitution).
  - Government direct provision of official financial support (e.g., guarantees or capital support) to troubled ADIs or other regulated entities requires Treasurer authority.
  - Treasurer decides applications to hold significant ownership stakes in ADIs, although this power has been delegated to APRA for ADIs with under a A$1 billion in assets.
  - Treasury provides advice to the Government on policy and possible reforms that promote a sound financial system, including on financial distress management arrangements.
- ASIC
  - Established by the Australian Securities and Investments Commission Act 2001.
  - Responsible for monitoring, regulating and enforcing corporations and financial services laws, and for promoting market integrity and consumer protection across the financial services sector and the payments system.

### Council of Financial Regulators (CFR): role and structure
- CFR is the coordinating body for work on crisis preparedness in Australia across the main financial agencies.
- Chaired by the Governor of the RBA and comprises representatives from the RBA, Treasury, APRA and ASIC (Heads of each and/or senior representatives).
- Purpose: contribute to the efficiency and effectiveness of financial regulation by providing a high-level forum for cooperation and collaboration among its members.
- CFR does not have legal personality, legal powers, or regulatory functions separate from those of its members; provides advice and non-binding recommendations to the Government on financial sector (stability) matters and input to member agencies' deliberations.
- Meets four scheduled times each year and as necessary on an ad hoc basis.
- CFR has established escalation protocols with communication modalities between and within the agencies; regular update teleconferences are held between senior representatives.

### CFR working groups, crisis management and bilateral coordination
- CFR has a Crisis Management Working Group (CMWG) focusing on:
  - Australia's financial crisis management arrangements.
  - Developing crisis resolution strategies (policy and operational guidance and pre-drafted documentation).
  - Conducting crisis simulation exercises.
  - Meetings or teleconferences every three weeks.
  - First point of contact in a crisis.
- CFR FMI Crisis Management Working Group responsibilities include developing the FMI crisis management toolkit and establishing FMI crisis communication arrangements.
- CFR may give greater prominence to its Crisis Communication Working Group in day-to-day crisis preparedness.
- Strong bilateral coordination among CFR member agencies through various bilateral MOUs covering operational matters such as information sharing and prompt notification of regulatory decisions likely to impact other agencies.
- Adequate legal basis for information sharing; APRA can share non-public information, including regarding the financial condition of an ADI, with other CFR agencies provided APRA is satisfied the disclosure will assist the receiving agency in performing its statutory duties.

### APRA internal organisation, resources and capabilities
- APRA aligned crisis management functions into a single Resolution and Enforcement Unit (R&E).
  - R&E covers policy and framework development, internal processes for responding to failure or crisis events, and working with APRA frontline supervisors on recovery and resolution planning.
  - Unit currently has approximately 25 staff.
  - R&E also covers APRA’s enforcement function, supports ongoing supervisory activities, potential resolution actions and administration of the FCS.
- APRA maintains a Financial Crisis Management Plan guiding R&E in identifying, managing and responding to a financial crisis, focusing on material and immediate issues where there is a sudden and serious escalation and immediate doubt about ongoing viability of an APRA regulated entity.
- Recommendation noted in text: R&E could be further strengthened by assigning dedicated legal experts to work with the unit as opposed to outsourcing tasks to APRA’s legal department.

### Legislative and regulatory developments in crisis management and resolution
- Progress since the 2012 FSAP includes consultation and policy work on strengthening APRA’s crisis management powers; consultation paused pending the 2014 Financial System Inquiry (FSI).
- Government agreed regulatory settings should provide regulators with stronger and clearer powers in event of failure of a prudentially regulated financial entity or part of an FMI; government agreed to consider other crisis-related reforms such as requirement for additional loss absorbing capacity, which has not been included in recent legislative amendments and is being progressed separately.
- Financial Sector Legislation Amendment Bill (Crisis Resolution Powers and Other Measures, 2017) received Royal Assent in March 2018 (the Crisis Management Act, (CMA)), further broadening APRA crisis management powers.
  - CMA confers new powers on APRA to resolve financial institutions (banks and insurance companies) in distress and strengthens APRA powers regarding conglomerate groups, statutory management, directions powers, transfer powers, conversion and write-off of capital instruments, stays, foreign branches, FCS, wind-up, and resolution planning.
  - Specific CMA enhancements listed in source:
    - Strengthens APRA’s statutory and judicial management regimes to ensure their effective operation in a crisis; allows appointment of a statutory manager to insurers, and group entities of authorized ADIs and insurers.
    - Enhances the scope and effectiveness of APRA’s existing directions powers.
    - Improves APRA’s ability to implement a transfer.
    - Ensures effective conversion and write-off of capital instruments in accordance with APRA’s prudential standards.
    - Enhances stay provisions to prevent exercise of APRA’s powers against one entity in a group triggering adverse rights under contracts of other relevant entities in the same group.
    - Improves APRA’s ability to respond when the Australian branch of a foreign regulated entity may be in distress.
    - Increases the efficiency and operation of Australia’s deposit insurance scheme (FCS) and ensures that it supports the crisis resolution framework.
    - Enhances and simplifies APRA’s powers in relation to the wind-up or external administration of regulated institutions, and other related matters.
    - Ensures APRA has clear powers to make appropriate prudential standards on resolution planning and to require institutions to take measures to improve their preparedness for resolution where appropriate.

### Observations on legal framework, independence and remaining gaps
- The Australian legal framework does not contain a standalone resolution regime for banks; statutory manager’s powers could be used to achieve a resolution on a going concern basis and to give directions to an ADI.
- Resolution powers are provided to APRA under the same legislation as for its supervisory function.
- APRA has a wide range of statutory powers to respond to distress, including enforcing prudential requirements and taking control of a distressed ADI and/or relevant parts of its group.
- The consent of the Treasurer is required for APRA to use certain resolution powers (e.g., directing a compulsory transfer of business from a bank, a holding company of a bank, or a subsidiary of a bank).
- Declaration of the FCS and activation of the FSSSA is the responsibility of the Treasurer, limiting APRA autonomy.
- Recommendation noted in text: independence of the resolution authority should be strengthened to allow APRA to effect least cost resolution using FCS funds without requiring prior consent of the Treasurer.

### Crisis preparedness actions and recommendations
- Legislative and policy developments in the Australian crisis management framework have not been tested; steps to operationalize tools remain to be completed.
- Recommended simulation exercise priorities:
  - Conduct broad, severe crisis simulations along with desktop exercises on a periodic basis (e.g., biennial) and targeted simulations more frequently.
  - Focus simulations on components never used (e.g., new FCS powers or unsecured lending by the RBA).
  - Include idiosyncratic crisis scenarios (e.g., cyberattack causing major losses at a systemic ADI) and system-wide disruptions (e.g., liquidity shocks).

### Early supervisory intervention: tools and processes
- APRA has a broad range of discretionary powers to take actions based on perceived bank risk profile and nature/severity of identified problems.
- While APRA does not have formal prompt corrective action requirements, it developed two programs to facilitate risk-based supervision: Probability and Impact Rating System (PAIRS) and Supervisory Oversight and Response System (SOARS).
- PAIRS
  - Risk assessment model incorporating two dimensions: the probability and impact of failure of an APRA-regulated entity.
  - Formalized dynamic assessment method combining APRA’s on- and offsite analysis.
  - Designed to formalize key risks: strategic, liquidity, credit, operational, and market and investment risk; board, management, risk governance and controls; capital coverage/surplus, earnings and capital support for an ADI combined with its impact to inform supervisory action plans.
  - Contains both quantitative and qualitative measurements.
- SOARS
  - Main tool to achieve consistent application of supervisory intervention built upon PAIRS results identifying ADIs at risk of failure.
  - Supervision intensity derived from combination of PAIRS probability and impact ratings.
  - Comprises four supervision stances: normal, oversight, mandated improvement, and restructure.
  - For entities in the “mandated improvement” category, APRA intervenes actively with measures including requiring remediation plans and monitoring milestones; revised business plans; governance changes; increasing capital/liquidity requirements; issuing directions; and others.
  - APRA’s internal framework includes escalation procedures moving from a SOARS stance of Normal to Restructure.

### APRA escalation framework and crisis decision-making bodies
- Escalation built upon heightened supervision, the Escalation and Enforcement Committee (EEC) and the APRA Financial Crisis Management Team (FCMT).
- EEC
  - Part of the formal escalation framework for banks (and insurers) experiencing stress.
  - Chaired by the R&E General Manager.
  - Key advisory body when APRA considers moving beyond day-to-day supervisory actions.
  - Does not have decision-making powers but is first step where there is reasonable prospect of use of APRA powers.
  - Includes APRA staff from frontline supervision, risk, resolution, and legal teams.
  - Maintains a watchlist of potential problem entities based on SOARS ratings and other supervisory information.
- FCMT
  - Convened under more severe financial conditions on EEC recommendation to the APRA executive board to decide on critical steps, including resolution.
  - Comprises senior staff from APRA’s executive and relevant supervisory, risk, resolution, enforcement and legal teams.
  - Coordinates APRA’s engagement with other CFR agencies and the public.

*Source: 1ausea2019001 - 7.*

### 21.      APRA has a comprehensive set of direction power to compel a regulated entity to take

### 1ausea2019001 - 21.      APRA has a comprehensive set of direction power to compel a regulated entity to take

### Direction powers and statutory management
- APRA has a comprehensive set of direction powers to compel a regulated entity to take specific action to address identified prudential issues.
- The CMA (2018) enhances APRA’s direction powers by:
  - Extending the ability to issue directions to subsidiaries of authorized non-operating holding companies (NOHC) and subsidiaries of regulated entities.
  - Providing “catch-all” directions powers to permit directions about matters not contemplated by other general directions in the Banking Act.
  - Clarifying that APRA may issue directions requiring entities to take specified actions to facilitate resolution, in normal times or during crisis.
  - Extending APRA’s ability to issue recapitalization directions to a regulated entity’s NOHC and certain other holding companies.
- APRA may appoint a statutory manager (itself or another person) without court approval; a statutory manager can assume all powers of the ADI’s board and senior management.
- The CMA extended statutory management scope to authorized NOHCs and domestically incorporated subsidiaries of an authorized NOHC or regulated entity, and added triggers for appointment of a statutory manager to a foreign ADI: (i) an application for external administration in a foreign country; or (ii) an external administrator has been appointed in a foreign country.
- The CMA enhances statutory immunity provisions for statutory and judicial managers.
- Observations and constraints:
  - The statutory manager power should be used cautiously because appointment could destabilize a bank by triggering/exacerbating funding runs.
  - The Banking Act does not compel APRA to make statutory manager appointments public, nor specify duration or explicitly require specifying powers at appointment.
  - To date, no statutory manager has been appointed to an ADI in Australia.

### Recovery and resolution planning — implementation and coverage
- Timeline and coverage:
  - APRA began recovery planning in 2011 for the six largest banks (including four systemic banks).
  - Extended requirement to 12 medium-sized banks in 2013, and later to three key service providers.
  - Total number of ADIs that have prepared full recovery plans is 21, which includes all large banks, representing about 90 percent of the assets held by the banking sector.
  - Most recent entity-specific feedback was provided early-2018; next round of revised plans submitted in 2019.
  - APRA released a letter to 81 ADIs requesting proportionate recovery plans; to date, 60 recovery plans have been submitted to APRA for review, with the remainder due by end-2018.
  - APRA plans to extend recovery planning to include foreign-owned ADI subsidiaries and branches.
- Operational testing and guidance:
  - Some ADIs are embedding operational testing practices and testing recovery plans.
  - APRA guidance advises ADIs to conduct regular (at least annual) tests and training exercises focusing on internal escalation, crisis management team functioning, and communication plans.
  - Stress testing exercises are recommended to test credibility of recovery plans and links between mitigating actions and recovery plans; APRA’s R&E team participates in banks’ stress testing to assess these links.
  - Recommendation: APRA should develop a guiding framework for triggers and early warning indicators to highlight when recovery options should be activated.
- Integration and monitoring:
  - Recovery and resolution planning should be iterative: resolvability assessments should inform resolution plans and test feasibility.
  - For largest ADIs, recovery and resolution planning should be a permanent part of the financial safety net.
  - Recovery plans should be integrated with stress testing, ICAAP and ILAAP, be fully understood and approved by management and boards, and reflect exceptional shocks.
  - APRA should monitor operational testing by largest ADIs more closely and provide guidance as needed.
  - APRA is requesting that ADIs submit a summary detailing the approach, results and learnings from the most recent operational testing of recovery plans by 2019.
- Group-level gaps:
  - APRA is advised to expand recovery planning requirements to financial conglomerates on a group basis.
  - To date, recovery planning has focused on underlying ADIs, general insurers and life insurers; eight systemic financial conglomerates are required to comply with prudential standards but have not yet been required to produce group recovery plans.
  - In 2017 APRA launched a targeted exercise with large general insurers and life insurers; group recovery plans are expected subsequently where relevant.

### Pre-positioning and resolvability assessment
- The revised industry acts (Banking Act, Insurance Act, Life Insurance Act) provide APRA pre-positioning direction powers to:
  - Assess how its powers could be used to resolve a relevant entity or group in a credible and orderly way and identify obstacles to resolution.
  - Work with supervised institutions to address obstacles; where pre-conditions are met APRA can direct a regulated entity, authorised/registered NOHC and subsidiaries to:
    - (i) make changes to systems, business practices or operations; or
    - (ii) reconstruct, merge or otherwise alter all or part of the business, structure or organisation of the body corporate or of the group constituted by the body corporate and its subsidiaries.
- APRA commenced a pilot resolution planning project and resolvability assessment in 2016, focusing on resolution strategies that reflect critical functions to be maintained in resolution.
- APRA plans to feed this work into a framework for establishing credible resolution plans that would include: methodology for assessing critical functions; resolvability assessments based on preferred resolution strategy; identifying pre-positioning measures; funding strategies; and processes/guidance for reflecting preferred resolution strategies.
- Recommendation: accelerate APRA’s work on resolution planning, particularly for large ADIs.

### Liquidity support and central bank facilities
- Systemic liquidity management:
  - Embedded in RBA’s open market operations (OMOs) and standing facilities.
  - RBA regularly provides liquidity to ADIs through OMOs (ADI repo funding via auction).
  - ADIs maintaining accounts with the RBA can access standing facilities, including overnight funding via repo with interest charged at a margin above the cash rate target.
  - RBA has no reserve requirements for ADIs.
  - RBA typically accepts as collateral: Australian and state government bonds; eligible ADI paper; highly rated asset-backed securities; highly rated supranational paper; and highly rated corporate paper (where counterparty is not materially related to credit quality of the security). All collaterals are subject to haircuts.
- Committed Liquidity Facility (CLF):
  - RBA announced a CLF in late-2011 to assist banks in meeting Liquidity Coverage Requirements (LCR).
  - CLF allows ADIs to access specified liquidity via repos with central bank, subject to a fee and collateral eligibility.
  - Due to scarcity of HQLA in Australia, RBA has arrangements with most domestically incorporated ADIs subject to LCR to enable them to fully satisfy liquidity rules.
  - Under the CLF ADIs can self-securitize portions of loan books and present highly-rated tranches to the RBA; RBA may broaden eligibility criteria at any time.
  - As a condition precedent to a CLF repo, the RBA can seek written confirmation from APRA that it does not object to the proposed utilization by the ADI.
  - APRA must be assured ADIs have taken reasonable steps to meet LCR through balance sheet management before relying on CLF; RBA must consider ADI has positive net worth in RBA’s opinion, after consulting APRA, as a condition precedent to each CLF utilization.
  - RBA has tested CLF activation with banks, obtaining required affirmations from banks’ CEOs and APRA on positive net worth.
- Emergency Liquidity Assistance (ELA) and unsecured lending:
  - In systemic situations the RBA could provide unsecured liquidity assistance to balance-sheet solvent ADIs that have exhausted collateral, as a last resort, and with government indemnity; such support would be discussed with CFR agencies and likely in conjunction with a package addressing the ADI’s distress.
  - Recommendation: RBA should formalize the ELA framework and define conditions (modalities for solvency assessment, government indemnity, decisions on lending to undercapitalized banks in recovery or resolution, requirement that all ELA be collateralized, and applicable risk controls like eligibility, valuation, haircuts).
  - Recommendation: RBA, with CFR and Treasury, should run a simulation test including process for obtaining a government indemnity to ensure timely disposition of funds for unsecured lending.

### Resolution regime and business transfer powers
- Existing resolution powers:
  - Banking Act and Financial Sector (Transfer and Restructure) Act provide APRA with resolution powers including: direction powers (remove/replace management, recapitalize without shareholder approval if necessary); appointment of statutory manager; business transfer powers (P&A transactions, bridge bank); and winding up powers.
  - Treasurer consent is required for certain resolution powers (e.g., compulsory transfer of business) unless Treasurer determines consent not required.
  - Winding up of an ADI conducted under the Corporations Act.
- Business transfer powers under Financial Sector (Transfer and Restructure) Act 1999:
  - Enable APRA to transfer all or part of a distressed ADI’s assets and/or liabilities to another ADI or a bridge bank, and to compulsorily transfer non-regulated business to non-regulated entities (e.g., asset management vehicle).
  - Transfer determination can be made in various circumstances, including where an ADI is likely to become insolvent and cannot be restored to solvency within a reasonable period.
  - 2018 CMA clarifies APRA’s transfer powers to give effect to transfers even absent relevant State or Territory legislation and allows transfer of shares.
- Use of direction powers:
  - APRA’s direction powers are comprehensive and can be used to enforce prudential requirements, early intervention, limit further deterioration, and implement resolution options including facilitating recapitalization.
  - Framework allows the possibility of resolving a problem bank while under private control by ordering recapitalization or recovery plan implementation.
- Immunity and compliance:
  - CMA provides clearer immunity for institutions, directors, management, employees and agents when taking reasonable steps to comply with an APRA direction, addressing concerns about potential breaches of other industry acts (e.g., Corporations Act).
  - Noncompliance with an APRA direction can give rise to a criminal sanction.

*Source: 1ausea2019001 - APRA direction, recovery, liquidity, and resolution chapters from IMF PDF.*

### 39.      APRA’s winding up powers enable it to act in situations where a regulated institution is

### 1ausea2019001 - 39.      APRA’s winding up powers enable it to act in situations where a regulated institution is

### Winding-up powers and mechanics
- APRA’s winding-up powers enable it to act in situations where a regulated institution is insolvent or about to become insolvent.
- In general, the winding-up of an ADI is governed by the Corporations Act under the same rules that apply to any other corporation.
- APRA may apply for the winding up of an ADI under either the Banking Act or the Corporations Act.
- The winding-up of an ADI will not commence without APRA’s consent and involvement.
- The CMA broadened APRA’s role in the liquidation of a regulated entity under the Banking Act:
  - APRA can apply to the Court for directions regarding any matter arising under the winding up of an ADI when an entity is under the control of either a liquidator or a provisional liquidator.
  - APRA can apply to the Federal Court of Australia for an order that an ADI be wound up if APRA considers that the ADI is insolvent and could not be restored to solvency within a reasonable period, without first having to appoint a statutory manager.
- The priority of payments in winding-up of an ADI is governed by both the Banking Act and the Corporations Act (for the rest of the creditors).

### Operationalizing resolution tools — gaps and requirements
- Key outstanding operational steps:
  - Financing the operations of bridge bank and asset separation tools through the FCS and/or the FSSSA remains to be worked out.
  - APRA needs to develop a detailed set of current data for banks’ assets to undertake swift asset valuations for solvency and viability assessments in a resolution.
  - Banks should be required to populate this data on short notice; this would be subject to regular testing by APRA, with occasional external audit.
  - APRA should be internally ready to undertake a viability assessment under acute time pressure, with pre-approved methodology and resources; these systems should be occasionally tested.
  - Testing should include potential situations where bank resolution involves temporary withdrawal from the payment system and subsequent re-entry, to avoid disruptions.

### Resolution safeguards — principles and gaps
- Main principles for resolution safeguards:
  - Resolution should respect hierarchy of claims with flexibility to depart from pari passu treatment of creditors of the same class.
  - No creditor (or shareholder) should be left worse off than had the bank or other entity been wound up under conventional insolvency law (“no creditor worse off than in liquidation”).
  - Option of ex post monetary compensation for any party left worse off under the resolution.
  - Appeal rights and ex post rights of judicial review with compensation from misuse of powers.
- Australia’s existing frameworks:
  - Australia has a compensation framework for acquisition of property other than on just terms in relation to banking, general and life insurance frameworks, and compulsory transfers of business; the CMA applies this compensation framework to new compulsory transfers of shares.
  - Stay provisions were enhanced in the CMA to ensure APRA’s exercise of powers against one entity in a group does not trigger adverse rights under contracts of other relevant entities in the same group.
  - Financial System Legislation Amendment (Resilience and Collateral Protection) Act 2016 safeguards continue to apply; new safeguards include a requirement that APRA must be satisfied a declaration to make a stay permanent would not have a detrimental effect on any counterparty to a close-out netting contract to which the declaration would apply.
- Notable gap:
  - There is no ‘no creditor worse off’ framework in the current legislative framework in Australia.
  - The Key Attributes call for an ex post valuation of the NPV outcome for creditors affected by a resolution transaction and a comparison with the likely NPV under conventional winding up to determine compensation; methodology for calculating compensation, who provides compensation, and mechanisms to challenge determinations should be introduced.

### Resolution of foreign ADIs (foreign branches)
- Key expectations from the Key Attributes:
  - The resolution authority should have resolution powers over local branches of foreign banks, with capacity either to support a resolution carried out by a home authority or, in exceptional cases, to take measures on its own initiative to preserve local financial stability; prior notification and consultation with the foreign home authority is expected when host jurisdiction acts discretely.
- Australian legislative changes and APRA powers:
  - Recent legislative changes have provided APRA with more powers in relation to foreign ADIs to the extent of their Australian business.
  - Foreign ADIs operating through a branch are subject to the statutory management regime and more extensive APRA powers for winding-up, transfer of business and revocation of authorization.
  - The Banking Act requires that the Australian assets of an insolvent foreign ADI be available to meet the ADI’s Australian liabilities in priority to its other liabilities.
  - APRA can issue directions to a foreign ADI (in distress or where financial system stability is at risk) that it can issue to a locally incorporated ADI, other than in relation to capital or the appointment or removal of directors.
  - APRA can direct a foreign regulated entity not to transfer assets out of Australia.
  - APRA may apply to the Federal Court for an order that a foreign ADI be wound up (based on the Corporations Act) when conditions (i), (ii) and (iii) described in the Banking Act apply.
  - The CMA provides APRA with powers to appoint a statutory manager to a foreign ADI, and prevents directors of the foreign regulated entity from acting in relation to the Australian business assets and liabilities of the foreign regulated entity to the extent those relate to such assets and liabilities once the entity is under statutory management.
- Coordination and recognition issues:
  - The CMA does not contain a statutory recognition of action taken by foreign regulators.
  - It may be beneficial to specify grounds for recognizing transfers of ownership or property from a failing financial institution to private firms, national insolvency authorities, or bridge financial institutions, and to extend mutual recognition to substantive decisions on claims and other resolution decisions.
  - Legislative changes facilitating recognition and enforcement of out-of-court resolution decisions taken by foreign authorities and preventing discrimination against creditors based on the location of their claim should be pursued.

### Systemic crisis management and resolution funding
- Ordinary liquidation is likely infeasible for large ADIs given size and systemic importance; costs of failure must be borne fairly and efficiently to avoid endangering the financial system or real economy.
- Loss-absorbing capacity (LAC) and TLAC:
  - The FSB TLAC principles require G-SIBs to have financial instruments available during resolution to absorb losses and enable recapitalization to continue critical functions while resolution is ongoing.
  - LAC requirements are intended to bolster gone-concern loss absorbency and recapitalization capacity and reduce moral hazard and taxpayer costs.
  - LAC frameworks for G-SIBs and D-SIBs have been adopted internationally to allow a wider range of debt holders to absorb losses (“bail-in”) instead of public funds (“bailout”), with adjustments based on size and risk profiles.
- Australian context:
  - No Australian bank has been designated as a G-SIB, but the four major banks are classified as domestic systemically important banks.
  - The 2014 FSI called for APRA to implement a framework for minimum loss-absorbing and recapitalization capacity for ADIs in line with international practice and expressed a preference for introducing securities with contractual bail-in features rather than creating a statutory bail-in regime.
  - The CMA clarified procedures and provided more legal certainty for conversion and write-off of already existing AT1 and T2 capital instruments, but did not introduce new requirements for additional LAC.
  - APRA, in collaboration with other CFR agencies, is considering how best to apply additional requirements for further loss absorbency for D-SIBs and is refining and calibrating an approach tailored to Australian conditions; a discussion paper on the topic was expected to be released in late-2018.
  - Availability of sufficient loss absorbing capacity is an important pre-requisite for all resolution options, including a bridge bank and P&A as well as internal loss absorbing capacity for SPE strategies.
- Bail-in and retail investor protection:
  - Statutory bail-in powers should be considered as an additional and complementary tool for SIFI resolution.
  - Australia has adopted a cautious public stance on creditor bail-in; the resolution authority should be able, upon entry into resolution, to convert or write-down contingent convertible or contractual bail-in instruments whose terms had not been triggered prior to entry into resolution (Key Attribute 3.5).
  - The workability of bail-in for large institutions is complicated by the nature of current AT1 and T2 frameworks, where AT1 is widely held by domestic retail investors.
  - Authorities should ensure strong investor protection for retail investors in LAC: robust disclosure of risks, sufficiently high minimum lot sizes, or prohibiting sale of certain instruments to the mass retail market.
- Fiscal backstop and operational modalities:
  - As a last resort, authorities should ensure solid but flexible arrangements for providing official financial support in a severe systemic crisis, including fiscal backstops to recapitalize banks, fund resolution funds, or provide indemnities to the central bank; readily available term sheets would help operationalize support quickly and minimize moral hazard.
  - Operational modalities of the FSSSA, the A$20 billion standing budgetary appropriation for financial crisis management purposes, should be discussed by the CFR and specified in the legal framework as soon as feasible.
  - The FSSSA was set up to “protect the interests of depositors of ADIs in ways that are consistent with the continued development of a viable, competitive and innovative banking industry; or (b) protecting financial system stability in Australia.”
  - The FSSSA could be used to fund deposit transfers and transfer of other business, transfer non-deposit ADI business (e.g., transferring impaired assets at assessed market value to an asset management vehicle), and to fund recovery structures in an open resolution as long as the FCS has not been declared; funds could also be used for the insurance industry.
  - The stated FSSSA goals appear to overlap with the broadened FCS mandate in some areas, creating ambiguity.
  - To enhance taxpayer protection, authorities should consider establishing broad principles for how the Government will recover costs of funding a resolution for the FSSSA (as legislated for the FCS) by:
    - establishing a priority claim on the rump ADI for funds released by the FSSSA; and
    - imposing a levy on the financial industry to make up any shortfall in recoveries.

*AUSTRALIA — INTERNATIONAL MONETARY FUND (excerpt).*

### 56.      The recently introduced bank levy could be more closely tied to the resolution framework;

### 1ausea2019001 - 56.      The recently introduced bank levy could be more closely tied to the resolution framework;

### Bank levy and resolution funding
- The recently introduced bank levy could be converted to support an ex-ante funded resolution fund.
- While similar levies in a number of advanced jurisdictions are paid directly into government general revenue, over the longer term it is advisable to use the bank levy to build up a dedicated resolution fund.
- The current bank levy payment in Australia into general revenue by only the five largest ADIs may not eliminate moral hazard and "may even increase this risk."
- Australia should create a pre-funded deposit insurance scheme (see Chapter below on Deposit Insurance), supported by a well-defined ex post funded resolution scheme; an ex ante funded resolution fund would not be unique.

### Loss-absorbing capacity, contingency planning, and legal framework
- Priority: increase loss absorbing capacity in the form of contractual bail-in instruments and mitigate moral hazard.
- Authorities should:
  - develop credible contingency plans;
  - build features ensuring ADIs bear the costs of their own failures;
  - protect banks’ critical functions, government funds and systemic stability in resolution plans and crisis response measures.
- Legal and creditor certainty needed:
  - ensure certainty of creditor hierarchy and a strong legal basis for exposing creditors to losses;
  - introduce the no-creditor-worse-off concept (important for statutory bail-in).
- Consider actions to limit contagion between larger banks and with other financial institutions.

### Deposit Insurance (Financial Claims Scheme, FCS) — structure and coverage
- The FCS is an ex post funded deposit insurance facility, backed by a standing budgetary appropriation.
- Payout financing:
  - initially financed by the Government through a standing appropriation of A$20 billion per failed ADI;
  - Additional funds could be made available, if needed, subject to parliamentary approval.
- Borrowing provision:
  - In cases where the Commonwealth Government is short of cash, APRA may, with the Treasurer’s written approval, and on behalf of the Commonwealth, borrow money on terms and conditions specified in, or consistent with, the approval.
- Administrative and recovery arrangements:
  - APRA administers the scheme and recovers payments and accompanying expenses from the assets of the failed bank;
  - Any shortfalls can be recovered from other banks via an ex post industry levy based on the Financial Claims Scheme (ADIs) Levy Act 2008.
- Coverage specifics:
  - The FCS covers all deposit accounts, including legal entities and non-resident AUD deposits with locally incorporated ADIs; it does not cover ADI branches abroad and the foreign branches in Australia.
  - Foreign branches are not permitted to accept initial retail deposits from Australian residents of less than A$250,000.
  - Australia applies “national depositor preference” treatment where domestic depositors rank ahead of depositors in foreign branches of the domestic bank (not in line with the Key Attributes).
- Current coverage level:
  - FCS covers deposits per depositor per ADI up to A$250,000, a level that fully covers nearly 97 percent of total deposit account holders, and approximately 48 percent of deposits by value, as of end-2017.
- ADI deposit totals:
  - Total ADI deposits in Australia: A$1.9 trillion;
  - Four largest banks: A$1.5 trillion;
  - Other Australian banks (excluding foreign subsidiaries): A$246 billion;
  - Foreign subsidiaries, credit unions, and building societies make up the remainder.
- Operational enhancements:
  - FCS mandate broadened to allow FCS funds to support a compulsory transfer of business (P&A) up to the amount to which each account-holder would be entitled under the FCS;
  - Treasurer can declare the FCS once a statutory manager has taken control of the ADI (or the general insurer), bringing forward the trigger point and reducing depositor uncertainty;
  - The least-cost safeguard should be applied when FCS is used for supporting P&A.

### FCS operational readiness and standards
- APRA’s Prudential Standard APS 910 Financial Claims Scheme (APS 910) (2013):
  - Focuses on banking industry readiness to operationalize the FCS;
  - Requires ADIs to identify each unique account-holder and develop and implement a Single Customer View, along with payment, reporting and communication requirements;
  - Makes the Board and senior management responsible for policies, procedures, integrity of operations, internal controls and relevant information;
  - ADIs must demonstrate systems and processes to meet APS 910 requirements.
- Supervision and testing:
  - Readiness to apply FCS is included in APRA prudential reviews;
  - APS 910 external audit work is aligned with the ADI’s routine audit work;
  - A cross-agency crisis exercise for execution of FCS was carried out and a dedicated FCS website was launched in 2016;
  - A testing schedule has been developed and released to the banks.
- Payout practices:
  - APRA has tested ADIs’ readiness to prepare Single Customer Views and to transmit the check and electronic funds transfer payment files to the RBA;
  - Further work may be needed by APRA and RBA to ensure these payment methods would meet the emerging best practice for deposit payout deadline of seven days.

### Funding model debate and recommendations for the FCS
- Historical review:
  - The 2012 FSAP recommended re-evaluating ex-ante funding merits; the 2014 FSI addressed funding arrangements and ultimately recommended retaining an ex post model.
  - The Australian government accepted the FSI recommendation to retain ex post funding, noting rising regulatory costs and plans to strengthen resilience reduce failure risk and costs.
- IMF recommendation:
  - It is recommended that Australia move from an ex-post funded depositor guarantee scheme to ex ante funded, collecting premiums from ADIs to build up a reserve fund against future ADI failures.
  - Rationale:
    - The Deposit Insurance Core Principles and the Key Attributes stress banks should bear at least some cost of bank failures and support ex ante funding with a government back-up line of credit.
    - The FCS continues to fall short of these principles.
    - Given high concentration of the Australian banking system and that ADIs are not required to pay ex ante or ex post premiums, the government-funded FCS effectively increases moral hazard in the financial sector.
  - Note: It may take years for the Government to recover the funds, plus interest, from the banks under the current arrangement.
- Further improvements recommended:
  - Clarify that activation of the FCS is at the Treasurer’s discretion, which in ex post schemes can delay payouts and introduce depositor uncertainty;
  - Consider options where other ADIs bid to assume deposits in P&A transactions;
  - Explicitly exclude interbank deposits and deposits of individuals regarded as responsible for institution deterioration (directors, managers, large shareholders, auditors and other insiders) from FCS coverage;
  - Discuss the appropriate approach to protect superannuation fund clients when exposed to bank failures through funds’ cash allocations (the fund, represented by its trustee, is the 'account holder' under the FCS).

### Cross-border coordination and Trans-Tasman issues
- New Zealand exposure:
  - The New Zealand market represents the largest and most systemically critical overseas exposure of the four major Australian banks, amounting to 12.7 percent of their total assets, and about 85 percent of assets of the New Zealand market.
  - Each of the four largest Australian ADIs has a wholly-owned subsidiary in New Zealand; two of the four also have substantial branches there.
- Other cross-border operations:
  - Other cross-border operations of Australian ADIs account for approximately 7 percent of banking sector assets in aggregate.
  - Australian operations of foreign banks (mainly branches) account for around 12 percent of domestic banking sector assets.
- Institutional framework:
  - Trans-Tasman Council on Banking Supervision (TTBC) established in 2005 to enhance information sharing, coordinated crisis response, and policy advice to governments.
  - Reciprocal legislation passed in 2005-2006 requires supervisors in each country, when taking regulatory action, to seek to avoid disruption to the other country’s financial stability.
  - A Memorandum of Cooperation (MOC) on the management of trans-Tasman bank distress was signed in 2010 by TTBC agencies, setting out high-level objectives and principles of trans-Tasman bank resolution and burden sharing.
  - The MOC underlines Australian participants’ responsibility for design and implementation of capital support for the parent bank and New Zealand participants’ responsibility for capital support for the New Zealand subsidiary, but details (SPE vs MPE) are less clear.
- SPE vs MPE resolution approaches:
  - Two stylized approaches internationally for D-SIBs:
    - SPE (Single Point of Entry): resolution tools applied to the ultimate holding company by a single national resolution authority.
    - MPE (Multiple Point of Entry): resolution tools applied to different parts of the group by two or more resolution authorities acting in a coordinated way.
  - Differences between Australia and New Zealand:
    - Australia has formal deposit insurance; New Zealand does not.
    - New Zealand has adopted open bank resolution (statutory management and reopening the next business day).
  - No consensus yet between Australian and New Zealand authorities on resolution modalities:
    - Australian authorities prefer SPE (generally preferred for D-SIBs).
    - RBNZ has focused on capacity for stand-alone resolution of the subsidiary using their form of bail-in (an MPE approach).
- TTBC work and recommendations:
  - TTBC agencies have developed high-level guidance on trans-Tasman bank distress and undertaken work on SPE resolution options.
  - In 2017 a large-scale crisis simulation tested coordination and communication using the SPE option; TTBC agencies agreed to continue considering feasibility of alternative options to have preferred and fallback options.
  - Recommendations:
    - Further discussions and simulation exercises, including idiosyncratic scenarios where shocks hit either New Zealand or Australian banks, are warranted;
    - TTBC should engage in bank-specific resolution discussions because Australian banks differ in exposure and interconnectedness regarding their New Zealand subsidiaries;
    - Discuss funding modalities, both public and private; any funding from New Zealand via SPE to an Australian parent must be legally structured so funds are channeled via the parent back to the New Zealand subsidiary;
    - Closer coordination of regulatory steps including foreign exposure and capital requirements is needed.

*1ausea2019001 - 56.      The recently introduced bank levy could be more closely tied to the resolution framework;*

### 72.      The arrangements for coordination on bank resolution and crisis management with other

### The arrangements for coordination on bank resolution and crisis management with other countries continue to warrant further development.

### Cross-border coordination and crisis-management arrangements
- Cross-border crisis management issues are discussed in dedicated supervisory sessions, but existing supervisory MOUs (focused on bank supervision) should be expanded to explicitly cover resolution and crisis management.
- Expanded MOUs should set out:
  - the process for information-sharing before and during a crisis; and
  - the progress on effective group-wide resolution plans and enhancing resolvability.
- Cross-border crisis management arrangements with some smaller jurisdictions remain less advanced.

### Legal and structural impediments to orderly resolution
- The national deposit preference rule, applicable to ADIs under the Banking Act, as well as ring-fencing of foreign-owned uninsured bank branches, can increase the cost of bank failures.
- Such regimes, if deployed without effective cross-border cooperation, present obstacles to the orderly and fair resolution of international financial institutions.
- The Financial Stability Board (FSB) has called for these regimes to be reformed.

### Footnoted operational considerations
- Footnote 50: In accordance with the FSB TLAC requirement, both the parent and subsidiary have to prepare to absorb losses; however, the cost for Australian ADIs’ to issue LAC, internal and external, in the context of the OBR in New Zealand can be high.
- Footnote 51: National depositor preference regimes exist where, in accordance with the law or regulation of the home country, the claims of depositors in the home country are preferred to the claims of branch depositors outside the home country if the firm becomes insolvent.

### Annex I — Status of Recommendations from the 2012 FSAP (selected entries)
- Conduct broad, drastic crisis simulations on a periodic basis and targeted crisis simulations (e.g., including testing responses to a systemic liquidity shock or coordination between RBA and Treasury on unsecured lending backed by a government guarantee) frequently (e.g., full simulations every two years and more focused simulations more frequently).
  - Partly implemented (except for testing the ELA framework)
- Legislative changes should be made to forestall premature disclosure of sensitive information as a result of “continuous disclosure” obligations.
  - Implemented (in CMA)
- Re-evaluate the merits of ex-ante funding for the FCS with a view toward converting it to an ex ante funded scheme.
  - Not implemented. Discussed in 2014 FSI, authorities do not support this recommendation.
- APRA should ensure that ADIs implement the SCV on, or where possible, ahead of schedule
  - Implemented
- FCS should be automatically activated on APRA’s application to the court for the winding up.
  - Partly implemented. Treasurer to declare the FCS once a statutory manager has taken control of the ADI
- Introduce competitive bidding for Purchase and Assumption (P&A) transactions or for paying agent bank.
  - Not implemented; planned
- Require ADIs that are covered by the FCS to display the Government’s guaranteed deposits seal; Advertising or brochures for the FCS should be supplied by the appropriate Government agency.
  - Not implemented. However, a FCS website has been set up
- The Treasury must be prepared to have a unit established to own and control government-owned ADIs, whether bridge or nationalized.
  - Implemented
- Adopt additional tools that reinforce the view that the industry should bear the costs of bank failures (e.g., higher loss absorbency capital for systemic ADIs).
  - Partly implemented. D-SIB surcharge imposed
- Require systemic ADIs to prepare recovery plans; other ADIs to prepare contingency plans (i.e., truncated recovery plans); and APRA should prepare resolution plans for systemic ADIs.
  - Partly implemented. Recovery planning process is advanced. Resolution planning has only recently been commenced
- Take steps to enhance cross-border coordination arrangements with other jurisdictions.
  - Partly implemented. Work still in progress
- Amend the priority of payments for the distribution of proceeds in a winding-up so as to not discriminate against creditors on the basis of the location of their claim or jurisdiction where it is payable.
  - Not implemented
- Broaden powers to resolve or facilitate a coordinated resolution of a domestic branch of a foreign bank by extending the framework for compulsory business transfers, statutory management and winding up to such operations.
  - Implemented (in CMA)
- Legislation should provide for transparent and expedited processes for the recognition and enforcement of out-of-court resolution decisions taken by foreign authorities.
  - Not implemented

*Source: 1ausea2019001 - 72. The arrangements for coordination on bank resolution and crisis management with other countries continue to warrant further development.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/1ausea2019001.pdf_