## _cr12310 ## Source details **Canonical URL:** [_cr12310](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12310.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12310.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12310.pdf.json) --- ### Executive summary — key findings - Australia’s banking sector emerged from the global financial crisis relatively well; historically few bank failures and few financial crises. - Key legislative and policy changes: - Significant legislative changes adopted October 2008; further improvements June 2010; additional legislative changes pursued. - Continuous disclosure obligations in securities law create high probability that resolution or crisis response measures will impact ADI securities prices. - Institutional framework: - Four principal agencies: Reserve Bank of Australia (RBA), Australian Treasury (Treasury), Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC). - These agencies comprise the Council of Financial Regulators (CFR), a non-statutory coordinating body chaired by the Governor of the RBA. - Crisis preparedness: - CFR and APRA developed crisis resolution strategies and ran simulation exercises in 2007 (APRA in-house), 2009 and 2011; recent legislative and policy developments remain untested in live events. - Deposit protection: - Financial Claims Scheme (FCS) covers deposits per depositor per ADI up to AU$ 250,000 (coverage fully covers around 99 percent of deposit accounts and over 50 percent of deposits by value). - FCS is ex post-funded and backed by an AU$ 20 billion standing budgetary appropriation per FCS declaration; no clear plan to mobilize these funds. - Market structure and systemic risk: - The four major ADIs hold approximately 76 percent of total banking assets. - New Zealand linkage: New Zealand operations of four majors account for approximately 10 percent of their global consolidated assets and about 90 percent of New Zealand’s banking sector assets. - Cross-border arrangements: - Reciprocal statutory obligations and Memorandum of Cooperation exist with New Zealand; arrangements with other jurisdictions are less advanced. ### Crisis preparedness — findings and recommendations - Findings: - CFR and APRA have developed crisis strategies and run exercises in 2007, 2009, 2011; recent legislative/policy changes untested. - Continuous disclosure rules risk premature public release of sensitive information during resolution. - Recommendations: - Conduct broad, drastic crisis simulations periodically (suggested full simulations every two years) and more frequent targeted simulations (e.g., systemic liquidity shock, RBA–Treasury coordination on unsecured lending with government guarantee). - Legislatively forestall premature disclosure resulting from continuous disclosure obligations: - Make APRA directions to keep certain information confidential binding and superseding Corporations Act requirements. - Provide that directors who refrain from disclosure under such APRA direction are not liable under the continuous disclosure regime. - Require ASIC to consider systemic stability issues and consult APRA when evaluating contraventions of disclosure requirements. - Further develop CFR harmonized communication strategy: - Identify single spokesperson(s); build media relationships; coordinate timing of communications; test via simulations. ### Financial Claims Scheme (FCS) — findings and recommendations - Findings: - FCS is ex post-funded; failed ADI will not contribute; no requirement for remaining open ADIs to contribute. - Disbursements expected to be recovered through asset liquidation recoveries; Government can impose industry levy if shortfall. - AU$ 250,000 coverage fully covers around 99 percent of eligible depositors and over 50 percent of deposit amounts by value. - Initial coverage originally AU$ 1 million at introduction; reduced to AU$ 250,000 from February 1, 2012. Term deposits existing on or before September 10, 2011 covered up to AU$ 1 million until December 31, 2012 or maturity. - ADIs slow to implement Single Customer View (SCV); without SCV, FCS cannot meet best practice payout within 7 days. - APRA reimbursement options: transfer deposit book to another ADI, checks drawn on RBA, electronic transfers to accounts at another ADI, or similar cash payments; payout promptness unclear. - Recommendations: - Re-evaluate merits of converting FCS to an ex ante funded scheme (or consider an industry-funded resolution/stability fund as alternative). - Require ADIs to implement SCV on, or where possible, ahead of the agreed timeframe of January 1, 2014. - Automatically activate FCS on APRA’s application to the Court for winding up. - Introduce competitive bidding for Purchase & Assumption (P&A) transactions or for paying agent bank; consider competitive processes to have other ADIs bid to act as paying agent. - Exclude insider deposits from coverage and offset overdue customer loans. - Require ADIs covered by FCS to display the Government’s guaranteed deposits seal; APRA to provide standard language for product descriptions and advertising. ### Crisis management and resolution of systemically important ADIs - Findings: - APRA required the six largest ADIs under a pilot to develop recovery plans; APRA has not yet started formal ADI-specific resolution planning. - Financial System Stability Special Account (FSSSA) established in 2008 provides standing budgetary authorization in tranches up to AU$ 20 billion each for troubled ADIs for recapitalization or similar purposes. - Treasury should be prepared to operationalize a bridge bank if needed. - Recommendations: - Treasury should prepare a unit to own and control government-owned ADIs (bridge or nationalized), handling ownership policies, director appointments, and exit strategies. - Adopt tools to ensure industry bears costs of failures (examples): higher loss absorbency capital for systemic ADIs; consider ex ante resolution fund; statutory bail-in provisions; capital surcharges. - Require systemic ADIs to prepare recovery plans; require other ADIs to prepare contingency (truncated recovery) plans; APRA should prepare resolution plans for systemic ADIs. - Use recovery plans to clarify private sector resolution options (raise capital, sell institution/assets, voluntary mergers). ### Cross-border resolution and cooperation - Findings: - Strong legal and institutional links with New Zealand: reciprocal statutory obligations (Section 8A of the APRA Act), Trans-Tasman Council on Banking Supervision (TTBC), and a 2010 MOC on trans-Tasman bank distress. - Cross-border links with jurisdictions other than New Zealand are less developed; other overseas operations account for approximately 5 percent of banking sector assets; Australian operations of foreign banks account for approximately 12 percent; branches of foreign banks represent approximately 9 percent of domestic banking sector assets. - RBA lacks explicit power to impose confidentiality on protected information it discloses in all cases. - Recommendations: - Enhance cross-border coordination arrangements with other jurisdictions; pursue MOUs for resolution and crisis management. - Enhance RBA’s statutory ability to exchange and protect confidential information with foreign authorities (amend RBA Act). - Amend priority of payments for distribution in winding-up to avoid discrimination against creditors by claim location/jurisdiction. - Broaden powers to resolve or facilitate coordinated resolution of domestic branches of foreign banks (extend compulsory business transfer, statutory management and winding-up frameworks to such operations). - Provide transparent, expedited processes for recognition and enforcement of out-of-court resolution decisions taken by foreign authorities (legislative amendment or empower APRA to take consistent domestic measures). ### Liquidity assistance, market operations, and committed facilities - RBA liquidity provision: - (i) Normal open market operations via daily repos against eligible collateral (bonds of highly rated sovereigns and supra-nationals, and New Zealand’s government). - (ii) Repos against a broader scope of collateral (could include an ADI’s bonds or AAA rated asset backed securities, including related party residential mortgage backed securities and asset-backed commercial paper). - Liquidity assistance first via RBA’s daily auction process; secondary assistance negotiated institution-by-institution in consultation with APRA. - Collateral haircuts determined by RBA; higher haircuts for assistance outside normal operations. - RBA has no reserve requirements. - Committed Liquidity Facility (CLF) under Basel III: - Australia will establish a CLF to assist ADIs in satisfying the Liquidity Coverage Ratio. - Access contingent on paying ongoing fees and supervisory consultations with APRA; APRA to ensure ADIs have taken reasonable steps toward LCR through balance sheet management before reliance on CLF. - Unsecured liquidity assistance: - RBA could provide unsecured liquidity assistance only with a government guarantee; arrangement to be discussed via CFR. - Recommendation: simulate the process for obtaining a guarantee to ensure timely availability of funds for unsecured lending by RBA. - Inter-bank deposit agreements (IDAs): - Under IDAs any one of the four largest ADIs could be required (at APRA direction) to place a maximum AU$ 2 billion deposit into one of the other three large ADIs, secured by low-risk conventional mortgage loans. - Useful only for idiosyncratic liquidity shortages of one of the four; not sufficient for systemic shortages. - IDAs will likely be phased out as they do not qualify as high quality liquid assets for Liquidity Coverage Ratio under Basel III. ### APRA supervisory and intervention powers - Early detection tools: - Probability and Impact Rating System (PAIRS): combines on and off-site analysis; quantitative and qualitative measurements; feeds supervisory action plans. - Supervisory Oversight and Response System (SOARS): uses PAIRS to identify ADIs at risk and set supervisory intensity; weighted so larger problem ADIs receive greater attention. - Direction and recapitalization powers: - Section 11CA of the Banking Act: APRA may direct an ADI or holding company to act or refrain from acting, or cause a subsidiary to do so; directions include penalties, removal/replacement of personnel, implementation of Recovery Plan. - Section 13E of the Banking Act: comprehensive powers to issue a direction to recapitalize an ADI. - APRA lacks formal prompt corrective action regime; rising PAIRS probability of failure ratings trigger intensified supervision. - Decisions (except those involving resolution of a distressed ADI) may be subject to merits review by the Administrative Appeals Tribunal (see review mechanisms). - Circumstances justifying directions include contravention or likely contravention of law or prudential requirements, inability to meet liabilities, material deterioration in financial condition, or conduct that may promote financial instability. - Types of directions APRA may issue include operational restrictions, ordering audits at ADI expense, removal/appointment of directors or senior managers, restrictions on giving financial accommodation, deposits, borrowings, dividends, repayments and contingent obligations. ### Statutory management, winding-up, and priority of payments - Statutory management: - APRA may appoint a statutory manager on grounds including likely insolvency or suspension of payments, or conduct likely to undermine depositor interests or financial stability. - Statutory manager powers include assuming board/management powers, selling whole or part of business, altering constitution, recapitalizing (Section 14AA), cancelling share capital, varying rights attached to shares. - Recapitalization may proceed where delay would negatively impact depositors or financial stability (prior independent expert report requirement may be deferred; APRA must publish written determination and Government Gazette notice). - Termination grounds include repayment of deposit liabilities, APRA no longer considering statutory manager necessary, or APRA applying to Court for winding up with liquidator appointed. - Recommendation: consider statutory limits on duration of statutory management (example: limit to one year with possible extensions). - Winding-up: - Conducted under the Corporations Act; APRA may apply for winding-up under Banking Act or Corporations Act. - Appointment of a statutory manager triggers automatic stay on legal proceedings and termination of any court-appointed administrator (Sections 15A and 15B of the Banking Act). - Solvency definition: - Section 95A: a company is solvent if it is able to pay all debts as and when they become due and payable. - Priority of payments (Banking Act Subsection 13A(3)): 1. any amounts owing to APRA for FCS payments made in respect of the ADI; 2. any amounts owing to APRA for administrative costs of activating the FCS payments made in respect of the ADI; 3. the ADI’s customer account liabilities in Australia that exceed FCS coverage; 4. any debt the ADI owes to the RBA; 5. any liabilities under the IDA or similar arrangement; 6. any other liabilities in the usual order of priority apart from Subsection 13A(3) (i.e., that under the Corporations Act). - Recommendation: amend priority of payments so as not to discriminate against creditors on the basis of location of claim or jurisdiction where payable. ### Recovery, contingency planning, and resolvability - Recovery and contingency planning: - APRA pilot required six largest ADIs to develop recovery plans; APRA decided to require medium-sized ADIs to prepare Recovery Plans as well. - Draft recovery plans submitted late 2011; final plans signed by CEO and board due by mid-2012. - Recommendation: APRA to formalize requirement for larger ADIs to prepare recovery plans and commence resolution planning; consider truncated contingency planning requirement for all ADIs scaled to size and importance. - APRA should annually check that ADIs’ recovery and contingency plans are up-to-date. - Recommendation: consider applying resolvability framework for G-SIFIs (Key Attributes) or a version thereof to larger ADIs, and commence institution-specific resolution planning. - Private sector burden sharing: - Prefer private sector solutions absent public funds: capital raises, sales, voluntary mergers. - Tools to reinforce industry-bearing costs: ex ante resolution fund, statutory bail-in, financial sector transaction tax, capital surcharges on systemically important institutions. - Practical suggestion: convert FCS to pre-funded scheme and require larger ADIs to hold higher loss absorbent capital. - Official financial support: - OBA discouraged; when used, should be tightly conditional and only to mitigate systemic risk when speed requires it. - Available mechanisms include unsecured liquidity support from RBA with government guarantee, FSSSA tranches up to AU$ 20 billion, establishment of bridge banks or asset management companies. - Bridge banks are temporary and can preserve critical banking functions while isolating bad assets. ### Legal protections, review mechanisms, and FCS assessment - Legal immunity: - Section 58 of the APRA Act: APRA, APRA members, APRA staff or APRA agents not subject to liability for acts/omissions in exercise of powers unless done in bad faith. - Sections 14C and 14D of the Banking Act provide similar protections to statutory managers. - Decision review mechanisms: - Internal review by APRA for certain decisions within 21 days. - Merits review by the Administrative Appeals Tribunal for certain decisions within 28 days after internal review; Tribunal may substitute its decision; Tribunal decisions appealable to Federal Court. - Judicial review available for administrative decisions (limited grounds) under the Administrative Decisions (Judicial Review) Act 1977. - Certain key bank resolution decisions (e.g., appointment/conduct of statutory manager; directions to recapitalize) are subject only to judicial review, not internal/merits review. - FCS assessment versus Deposit Insurance Core Principles: - Mandate: clear “paybox” mandate to reimburse protected depositors; administered within APRA without separate supervisory board. - Coverage: AU$ 250,000 covers fully around 99 percent of depositors and over 50 percent of deposits by value; coverage includes insiders and related parties; no offset provision for matured or past-due loans. - Funding: ex post with AU$ 20 billion appropriation per declaration; ADIs pay no premiums—creates moral hazard and weak incentives for risk monitoring. - Recommended enhancements: convert to ex ante fund with credible liquid reserve invested for safety and liquidity; initial flat-rate periodic assessments with move to risk-based assessments; prohibit placing fund with member ADIs; require mandatory display of Government guaranteed deposit seal; require SCV and competitive P&A paying agent processes. - Reimbursement timing: lack of SCV would prevent payer from beginning reimbursements within 7 days. *Source: _cr12310 - IMF staff report (excerpt provided).* ### 1. Summary of Recommendations .......................................................................................... ### 1. Summary of Recommendations ### Executive summary — key findings - Australia has a history of few bank failures, even fewer financial crises, and its banking sector emerged from the global financial crisis relatively well. - The Government adopted significant legislative changes in October 2008 to put in place guarantee arrangements for retail deposits; further improvements were made in June 2010 and additional legislative changes are being pursued. - The Australian financial sector institutional framework primarily comprises four agencies: the Reserve Bank of Australia (RBA), the Australian Treasury (Treasury), the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC). These agencies comprise the Council of Financial Regulators (CFR), a non-statutory coordinating body chaired by the Governor of the RBA, meeting quarterly and as necessary on an ad hoc basis. - The CFR has been developing crisis resolution strategies and conducted crisis simulation exercises in 2007 (in-house by APRA), 2009 and 2011. Recent legislative and policy developments have not been tested in live events. - Australia’s continuous disclosure obligations in securities law create a high probability that resolution or crisis response measures will impact ADI securities prices; poor coordination of disclosure compliance, timing of actions, and public communications could risk financial stability or thwart resolution actions. - APRA has strong early-intervention and resolution powers: powers to order recapitalization, remove or replace directors and officers, appoint a statutory manager, compel purchase-and-assumption transactions, and require transfer of assets/liabilities to a willing ADI, bridge bank, or asset management company. Winding up occurs through a court-based procedure with APRA involvement. - The Financial Claims Scheme (FCS) covers deposits per depositor per ADI up to AU$ 250,000, a level that fully covers around 99 percent of deposit accounts and over 50 percent of deposits by value. The FCS is ex post-funded and backed by an AU$ 20 billion standing budgetary appropriation per FCS declaration; there is currently no clear plan to mobilize these funds. - The RBA’s normal market operations and the scope of eligible collateral make it extremely unlikely that an ADI would be unable to obtain adequate liquidity under most circumstances; liquidity assistance would first be via the RBA’s daily repo auction process and secondarily negotiated institution-by-institution in consultation with APRA. - The Australian banking sector is highly concentrated: the four major ADIs together hold approximately 76 percent of total banking assets. The major ADIs have similar business models and funding advantages from systemic size and implicit government support. - Cross-border cooperation with New Zealand has been advanced (reciprocal statutory obligations, TTBC resolution policy working group, Memorandum of Cooperation), but arrangements with other jurisdictions are less advanced. ### Crisis preparedness (findings and recommendations) - Findings: - The CFR and APRA have developed crisis resolution strategies and run simulation exercises (2007, 2009, 2011), but recent legislative and policy changes remain untested in live crises. - Continuous disclosure rules risk premature public release of sensitive information during resolution. - Recommendations (Table 1 items (i)–(ii)): - Conduct broad, drastic crisis simulations on a periodic basis and targeted crisis simulations (e.g., 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). - Legislative changes should be made to forestall premature disclosure of sensitive information as a result of “continuous disclosure” obligations. ### Financial Claims Scheme (FCS) — findings and recommendations - Findings: - FCS is ex post-funded; a failed ADI will never contribute (other than via shareholder losses imposed at failure); no requirement exists for remaining open ADIs to contribute to defray scheme expenditures. - Disbursements are expected to be recovered through asset liquidation recoveries and the government has an option to impose an industry levy if there is a shortfall. - ADIs have been slow to implement a single customer view (SCV) record-keeping system critical for timely insured depositor reimbursement. - APRA’s planned reimbursement options include transfer of deposit book to another ADI, checks drawn on RBA, electronic transfers to accounts at another ADI, or similar cash payments. It is unclear how promptly a payout could be made; doubtful that payout could meet emerging best practice of within 7 days. - Recommendations (Table 1 items (iii)–(viii)): - Re-evaluate the merits of ex-ante funding for the FCS with a view toward converting it to an ex-ante funded scheme. - APRA should ensure that ADIs implement the SCV on, or where possible, ahead of schedule. - FCS should be automatically activated on APRA’s application to the court for the winding up. - Introduce competitive bidding for Purchase and Assumption (P&A) transactions or for paying agent bank. - Exclude insider deposits from coverage and offset overdue customer loans. - 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. ### Crisis management and resolution of systemically important banks - Findings: - APRA required the six largest ADIs under a pilot program to develop recovery plans; APRA has not yet begun formal ADI-specific resolution planning. - The Financial System Stability Special Account (FSSSA) was established in 2008, providing for standing budgetary authorization in tranches of funding of up to AU$ 20 billion each to troubled ADIs for recapitalization or similar purposes. - Treasury should be prepared to operationalize a bridge bank if needed. - Recommendations (Table 1 items (ix)–(xi)): - The Treasury must be prepared to have a unit established to own and control government-owned ADIs, whether bridge or nationalized. - 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). - 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. ### Cross-border resolution and crisis management - Findings: - APRA and New Zealand prudential supervisor have reciprocal statutory obligations and an MOC; cross-border arrangements with other jurisdictions are less advanced. - Powers to resolve or facilitate coordinated resolution of a foreign ADI’s domestic branch could be broadened. - Enhancements to the RBA’s ability to exchange information with foreign authorities would be useful. - Recommendations (Table 1 items (xii)–(xvi)): - Take steps to enhance cross-border coordination arrangements with other jurisdictions. - Enhance RBA’s ability to exchange information with foreign authorities. - 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. - 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. - Legislation should provide for transparent and expedited processes for the recognition and enforcement of out-of court resolution decisions taken by foreign authorities. *Source: _cr12310 - 1. Summary of Recommendations (IMF staff report).* ### 14. Recognizing that the effectiveness of the safety net and crisis management ### _cr12310 - 14. Recognizing that the effectiveness of the safety net and crisis management ### III. INSTITUTIONAL ARRANGEMENTS, COORDINATION, AND PREPAREDNESS — Overview - A well-established institutional framework for financial stability is a precondition to effective use of financial safety net and crisis management tools. - Minimum features: clear mandates for institutions, explicit coordination mechanisms, solid legal basis for exchange of confidential information in times of distress, and ex ante planning for policy communication and decision-making. - Structure of the note: Part II analyzes domestic and cross-border frameworks; Part III discusses early intervention powers and liquidity assistance; Part IV examines tools for resolution of non-systemic ADIs; Part V focuses on system-wide crises and systemically important ADIs; Part VI addresses cross-border resolution issues. ### A. Domestic Inter-Agency Coordination and Information Sharing — Institutional roles - The Australian financial sector institutional framework primarily comprises four agencies with clear mandates and distinct allocations of power. Responsibilities are divided along functional lines: - The RBA: - Performs traditional central bank functions, including conducting monetary policy and payment system oversight and serving as the lender of last resort. - Has an implicit financial stability mandate and is generally recognized as having responsibility for overall financial stability in Australia. - APRA: - Is the prudential supervisor and resolution authority. - Regulates and supervises ADIs, general and life insurance companies, and most members of the superannuation industry and serves as the resolution authority for these institutions. - Administers payouts under the FCS in respect of ADIs and general insurers. - In performing its functions, is required to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, promotes financial system stability in Australia. - Protection of depositors and policyholders is part of APRA’s legal mandate under the Banking Act 1959, Insurance Act 1973 and Life Insurance Act 1995. - APRA has statutory obligations to protect the interest of depositors and policyholders. - The Treasurer and the Minister for Finance and Deregulation (MoF): - Are gatekeepers for the use of public funds in support of ADI resolution and crisis management. - The Treasurer is vested with powers to approve certain actions that could potentially put public funds at risk. - The Treasurer’s consent is required for the activation of the FCS and the FSSSA (which are backed by standing budgetary appropriations); for APRA to direct a failing ADI to transfer its business to a healthy institution (which, under the Australian Constitution could trigger compensation requirements for certain property holders); and for the Government to directly provide official financial support (e.g., guarantees or capital support) to one or more troubled ADIs or other regulated entities. - The MoF regulates government spending. Actions by the Treasurer that could result in public expenditures require the consent of the MoF. - ASIC: - Is the conduct of business regulator and consumer protection authority. - Responsible for assessing and advising on implications of a potential crisis for financial markets and investors, and the disclosure implications of any resolution actions taken with respect to a publicly-traded company (including the four major ADIs). ### A. Domestic Inter-Agency Coordination and Information Sharing — Coordination mechanisms and information sharing - Council of Financial Regulators (CFR): - Non-statutory coordinating body chaired by the Governor of the RBA; comprises representatives from the RBA, Treasury, APRA and ASIC (CEOs and/or nominated deputies). - Purpose: contribute to efficiency and effectiveness of financial regulation by providing a high-level forum for cooperation and collaboration. - Operates in normal times and in crisis situations. - Has four scheduled meetings each year, and meets on an ad hoc basis as necessary. - Regularly forms working groups to study policy issues (example: OTC derivatives market regulation). - Has a CFR Crisis Management Working Group; in 2008 the CFR Agencies entered into an MOU on Financial Distress Management. - Formal obligations and notification: - APRA has an obligation to notify the Treasurer when an ADI is under financial distress (Section 10 of the Australian Prudential Regulation Authority Act 1998 (APRA Act)); this is flexible and case-by-case. - Expectation that the entire Council would be informed in cases of severe distress; the Council discusses responses and seeks consensus, but discussions are non-binding; the party holding relevant powers is ultimately responsible for action. - Legal basis for information sharing: - Confidentiality of ADI-specific data is protected under secrecy laws in the APRA Act, and subject to disclosure in accordance with purpose and use requirements. - APRA may share non-public information regarding the financial condition of an ADI with Treasury, the RBA, or ASIC if APRA is satisfied disclosure will assist the agency in performing its functions (Section 56 of the APRA Act and Regulation 5 of the APRA Regulations). - APRA can impose confidentiality obligations on the receiving party at time of disclosure (Subsection 56(9) of the APRA Act). - The RBA, Treasury and ASIC also have the ability to disclose protected information to the other CFR Agencies in certain circumstances (Sections 79A and 79B of the Reserve Bank of Australia Act 1959; Section 127 of the Australian Securities and Investments Commission Act 2001; Regulation 2.1 of the Public Services Regulations 1999). ### B. Cross-Border Coordination and Information Sharing — Links with New Zealand and broader international arrangements - New Zealand operations of the four major Australian ADIs: - Each major ADI has a wholly-owned subsidiary in New Zealand; two of the four also have substantial branches there. - The New Zealand operations account for approximately 10 percent of their global consolidated assets and a similar share of their total profits. - They account for about 90 percent of New Zealand’s banking sector assets. - Credit ratings of the New Zealand subsidiaries are set with reference to the financial position of their respective parents. - Subsidiaries named: ANZ National Bank (ANZ), ASB Bank (Commonwealth Bank of Australia), Bank of New Zealand (National Australia Bank), and Westpac New Zealand (Westpac Banking Corporation). Westpac and Commonwealth Bank also have significant branches. - Legal and institutional cooperation with New Zealand: - In 2005-2006, Australian and New Zealand parliaments enacted laws imposing reciprocal obligations on APRA and the Reserve Bank of New Zealand (RBNZ) to support each other in prudential regulation and financial stability. - APRA has explicit statutory obligations (Section 8A of the APRA Act): (i) support New Zealand authorities in meeting statutory responsibilities for financial stability in New Zealand; (ii) to the extent reasonably practicable, avoid actions likely to have a detrimental effect on financial system stability in New Zealand; and (iii) consult with and consider advice of New Zealand authorities, when practicable, before taking action likely to have a detrimental effect on New Zealand financial stability. - Trans-Tasman Council on Banking Supervision (TTBC) formed in 2005 to enhance cooperation; comprises representatives of the Australian and New Zealand Treasuries, the RBA, RBNZ and APRA; ASIC also participates. - In 2010, TTBC agencies, along with ASIC, signed a Memorandum of Cooperation (MOC) on management of trans-Tasman bank distress. - Cross-border coordination with other jurisdictions: - Cross-border links with countries other than New Zealand are less developed and at earlier stages. - Other cross-border operations of Australian ADIs account for approximately 5 percent of banking sector assets in the aggregate. - Australian operations of foreign banks (mainly branches) account for around 12 percent of domestic banking sector assets. - APRA has bilateral MOUs on supervisory matters with several foreign supervisory agencies, including those in the US and UK; discussions on MOUs for bank resolution and crisis management with the U.S. and other jurisdictions are ongoing. - Legal gaps and recommended enhancements: - APRA and ASIC have a strong legal basis to share information with foreign authorities and to protect confidentiality. - RBA lacks an explicit power to impose confidentiality on protected information it discloses (except for confidential APRA data that it discloses). - RBA could not, for example, impose on Treasury an obligation to keep confidential information that RBA received from a foreign supervisory authority. - RBA and Treasury are working to amend the RBA Act to provide the RBA with a legal basis to share information and protect confidentiality of received information more in line with APRA’s powers. - Recommendation: legislative changes to ensure all CFR agencies are well-positioned to exchange information. ### C. Crisis Preparedness — Exercises, communications, and legislative changes - Crisis preparedness priorities: - Maximizing crisis preparedness through ex-ante planning should continue to be a key priority. - CFR and TTBC are being used as forums to enhance crisis preparedness; both developing crisis resolution strategies including policy and operational guidance, pre-drafted documentation, and conducting crisis simulation exercises. - CFR conducted a domestic crisis simulation exercise in 2009; TTBC conducted a trans-Tasman exercise in 2011. - APRA conducted its own simulation exercise in 2007 (before key features of the current safety net were in place—namely, APRA’s ability to impose statutory management prior to an ADI’s insolvency and the FCS). - Given recent legislative and policy developments, the safety net and crisis management framework has not been fully tested. - Recommendation: conduct broad, drastic crisis simulations periodically and targeted crisis simulations more frequently. - Suggested simulation focuses: (i) an idiosyncratic crisis (e.g., fraud causing major losses at a systemic ADI); (ii) problem areas revealed in previous simulations; (iii) system-wide disruptions (e.g., liquidity shocks); and (iv) testing components of the framework that have never been used (e.g., depositor payouts under the FCS or unsecured lending by the RBA). - Additional desktop exercises, particularly in problem areas, should be considered. - Communications in crisis: - Effective and timely communications are critical to maintaining public confidence when addressing problem ADIs. - Aim: convey that authorities have taken strong and sober action that will fortify the banking sector. - Without effective communications, authorities risk spending time countering criticism, elevating tension, and undermining banking system reliability and effectiveness. - Recommendation: further develop a communication strategy to harmonize CFR agencies’ messaging. - Strategy elements could include: - Building effectual relationships and trust with media representatives who cover the financial system in regular times. - Identifying one spokesperson to coordinate and manage information on behalf of all CFR Agencies; or at maximum, one per agency. Communications should be simple and emphasize that authorities acted in the best interests of depositors and banking system stability. - Ensuring timing of communication is well-coordinated and tested through simulation exercises. - CFR has established a Working Group on Crisis Communication dedicated to developing crisis management communications strategies, material and logistical arrangements. - Legislative changes to manage disclosure risks: - The Australian securities law regime requires immediate and continuous disclosure to investors when a covered entity becomes aware of information not generally available that a reasonable person would expect to have a material effect on the price or value of the shares, debentures or other interests in the entity. Failure to do so could result in liability for directors. - The need for a resolution package, or early stages of crisis resolution discussions, would reasonably be expected to have a material effect on the price or value of an ADI’s securities; publicly listed ADIs would be required to make appropriate disclosures under the Corporations Act. - Poor coordination between disclosure compliance and resolution actions/public communications could pose risks to financial stability (including depositor runs); stripping of the ADI’s assets by insiders; or market disruptions. - Recommended legislative changes: - (1) Make clear that a direction by APRA to keep certain information confidential is binding and supersedes any requirement to the contrary in the Corporations Act. - (2) Provide that the failure of a director to disclose such information in accordance with the continuous disclosure regime will not result in liability for the director. - (3) Require ASIC to consider systemic stability issues and consult APRA when evaluating contraventions of the disclosure requirements. *Source: _cr12310 - 14. Recognizing that the effectiveness of the safety net and crisis management (PDF chapter).* ### 28. Generally, central banks have a variety of tools to provide liquidity assistance in ### Generally, central banks have a variety of tools to provide liquidity assistance in ### Liquidity assistance framework and market operations - RBA generally provides liquidity to ADIs through: - (i) normal open market operations via daily repos against eligible collateral (bonds of highly rated sovereigns and supra-nationals, and New Zealand’s government); and - (ii) repos against a broader scope of collateral (which could include an ADI’s bonds or AAA rated asset backed securities (including, related party residential mortgage backed securities and asset-backed commercial paper)). - Liquidity assistance in the first instance would be accomplished via RBA’s daily auction process; in the second instance assistance would be negotiated on an individual institution basis, in consultation with APRA vis-à-vis supervisory and solvency concerns. - Procedures involve haircuts on collateral, the size of which are determined by the RBA; haircuts are progressively higher for liquidity assistance outside of normal market operations. - RBA has no reserve requirements; and reportedly has seen no need for such a tool. ### Committed Liquidity Facility (CLF) under Basel III - Australia will establish a Committed Liquidity Facility (CLF) to assist ADIs in satisfying the Liquidity Coverage Ratio. - CLF features: - Enables participating ADIs to access a pre-specified amount of liquidity by entering into repurchase agreements of eligible securities outside the RBA’s normal market operations. - Access to the CLF will be contingent upon ADIs paying ongoing fees, and supervisory consultations with APRA. - APRA will need to be assured that ADIs have taken all reasonable steps towards meeting their Liquidity Coverage Ratio requirements through their own balance sheet management, before relying on the CLF. ### Unsecured liquidity assistance in systemic situations - RBA could provide unsecured liquidity assistance, but would only do so with a government guarantee. - Arrangements for a guarantee would be discussed and arranged through the CFR, likely in conjunction with a package of measures that would address the ADI’s distress. - RBA has never had to provide unsecured liquidity assistance and thus the Government has not been confronted with a request for a guarantee. - Recommendation: RBA, in conjunction with the CFR and the Treasury, should run a simulation to test the process of obtaining the guarantee to allow that funds for unsecured lending by the RBA are available on a timely basis. ### Inter-bank deposit agreements (IDAs) among the four largest ADIs - Under IDAs any one of the subject ADIs could be required (at the direction of APRA) to place a maximum AU$ 2 billion deposit into one of the other three large ADIs. - The deposits would be secured by low-risk conventional mortgage loans. - Limitations: - Useful only when one of the four largest ADIs was experiencing a liquidity shortage; not sufficient if the shortage were systemic and affecting all four. - These instruments will not qualify as sufficiently high quality liquid assets to meet the Liquidity Coverage Ratio under Basel III; this program will likely be phased out over time. ### APRA corrective measures: early detection and supervisory response - APRA programs to detect and address ADI weaknesses: - Probability and Impact Rating System (PAIRS): combines on and off-site analysis to formalize dynamic assessment of key risks, management and controls and capital support; contains both quantitative and qualitative measurements; results feed supervisory action plans. - Supervisory Oversight and Response System (SOARS): uses PAIRS results to identify ADIs at risk of failure and determine supervisory intensity; SOARS is weighted so larger problem ADIs receive greater attention. - Supervisory approach: - APRA implements enforcement measures progressively, starting with informal measures (e.g., moral suasion, post-review letters with deadlines) and escalating as needed. - As problems occur, APRA will devote more specialist staff and pay attention to external signals such as ADI ratings, share prices, media items to design remediation plans. ### APRA’s powers to compel action (Directions and recapitalization) - Under Section 11CA of the Banking Act, APRA may direct an ADI (including an ADI under statutory management) or the holding company to: - (i) act or to refrain from acting in a certain manner; or - (ii) cause a subsidiary to act or to refrain from acting in a certain manner. - Section 11CA authorizes directions with respect to imposing penalties, removing and replacing personnel, and implementing a Recovery Plan. - Under Section 13E of the Banking Act, APRA has comprehensive powers to issue a direction to recapitalize an ADI. - APRA does not have formal prompt corrective action powers or requirements; instead, rising PAIRS probability of failure ratings lead to more intense supervision and enforcement. - Decisions (except those involving the resolution of a distressed ADI) could be subject to full merits review by the Administrative Appeals Tribunal (Annex II). ### Examples of circumstances justifying directions (Box 1) - Circumstances include (selection of items as presented): - The ADI or holding company has contravened a legal provision. - The ADI or holding company is likely to contravene a legal provision, a prudential regulation, requirement or standard. - The direction is necessary for protection of depositors. - The ADI or holding company is, or is about to become, unable to meet its liabilities. - There is, or might be, a material deterioration in the financial condition of the ADI or the holding company. - The failure to issue a direction would materially prejudice the interests of depositors. - The ADI or the holding company is conducting its affairs in a way that may cause or promote financial instability in Australia. ### Types of directions APRA may issue (Box 1) - To comply with legislation or prudential standards. - To order an audit (by an auditor chosen by APRA) at the expense of the ADI. - To remove a director or senior manager; appoint persons as directors or senior managers for APRA-directed terms. - Not to give any financial accommodation; not to accept deposits; not to borrow; not to pay dividends; not to repay deposits or advances; not to undertake contingent financial obligations. - Anything else as to the way in which the affairs of the ADI or holding company are to be conducted or not conducted. ### Resolution of non-systemic ADIs: framework and options - Authorities consider any ADI—regardless of size—could be systemic depending on circumstances; an analysis of systemic impact at the point of failure guides resolution strategy selection. - Components of the safety net applicable to non-systemic ADIs: - Resolution under private control (including directions and business transfer powers). - Statutory management by APRA or its designee. - Winding-up under court-based procedure. - Activation of the Financial Claims Scheme (FCS) is described elsewhere. ### Resolution under private control - If ADI management is willing and able to facilitate resolution, APRA could use directions to resolve the ADI under private control. - Under the Financial Sector (Business Transfer and Group Restructure Act) 1999 (Business Transfer Act), APRA could determine that an ADI should transfer assets and/or liabilities to a healthy ADI, a bridge bank, or an asset management company (“compulsory business transfer”), subject to Ministerial consent. ### Statutory management: grounds, powers, and termination - APRA may appoint a statutory manager (itself or another person) where: - the ADI informs APRA it is likely to become unable to meet obligations or to suspend payment; or - APRA considers that, in the absence of external support, the ADI may become unable to meet obligations, may suspend payment, is likely unable to carry on banking business in Australia consistently with depositors’ interests, or is likely unable to carry on banking business consistently with financial stability in Australia; or - the ADI becomes unable to meet its obligations or suspends payment. - Statutory manager roles: - Open resolution: enable the ADI to meet obligations and continue business. - Closed resolution: position the ADI for orderly liquidation; ADI closed to new business; APRA petitions court to wind-up the ADI. - Powers of a statutory manager include (selection of statutory powers as presented): - assume all powers of the ADI’s board and senior management; - sell whole or part of ADI’s business on terms the statutory manager considers appropriate; - alter an ADI’s constitution to promote protection of depositor interests and financial system stability; - recapitalize an ADI by issuing, cancelling or selling shares or rights; reduce share capital by cancelling paid up share capital not represented by available assets; vary or cancel rights or restrictions attached to shares or a class of shares. - Recapitalization powers (Section 14AA of the Banking Act) require written notice to shareholders explaining effects; prior independent expert fair value report is required except where delay would negatively impact depositors or financial stability—then recapitalization may proceed while report is pending and APRA must publish its written determination and a notice in the Government Gazette. - Termination of statutory management (Subsection 13C(1) of the Banking Act): APRA may terminate when: - (1) the ADI’s deposit liabilities have been repaid, or APRA is satisfied suitable provision has been made for repayment; - (2) APRA considers it no longer necessary for a statutory manager to remain in control; - (3) APRA has applied to the Court for the ADI to be wound up and a liquidator has been appointed. - Recommendation: Authorities should consider whether to include limits to the duration of statutory management under the Banking Act (example suggestion: limit to one year with possible extensions). ### Winding-up of ADIs - Winding-up is governed by the Corporations Act under the same rules as other corporations. - APRA may apply for winding-up under either the Banking Act or the Corporations Act. - Under the Banking Act, APRA may apply for winding-up if the ADI is under statutory management and APRA considers the ADI insolvent and cannot be restored to solvency within a reasonable period. - Under the Corporations Act, winding-up may be ordered on general grounds (e.g., oppressive conduct, just and equitable grounds) or insolvency grounds; the Court may order winding-up in insolvency. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### Section 95A provides that a company is solvent if it is able to pay all ### _cr12310 - Section 95A provides that a company is solvent if it is able to pay all ### Solvency, statutory management, and winding-up procedures - Section 95A: a company is solvent if it is able to pay all debts, as and when they become due and payable. - APRA’s role in winding-up: - The actual winding up of an ADI is to be conducted in accordance with the Corporations Act, irrespective of whether APRA proceeds under the Banking Act or Corporations Act. - Winding-up of an ADI will not commence without APRA’s consent and involvement. - The Banking Act permits APRA to apply for winding up if the ADI is under statutory management and APRA considers the ADI insolvent and not restorable to solvency within a reasonable period (Section 14F of the Banking Act). - APRA may apply to the Court for winding up under both general and insolvency grounds (Section 459P and paragraph 462(2)(h) of the Corporations Act; Regulation 5.4.01 of the Corporations Regulations 2001). - Other specified parties (including the ADI or its creditors) may apply to the Court for winding up, but must first notify APRA; failure to notify results in criminal liability. - Appointment of a statutory manager triggers: (i) an automatic stay on legal proceedings (including winding-up proceedings) and (ii) termination of any court-appointed administrator (Sections 15A and 15B of the Banking Act). ### Priority of payments in ADI insolvency (Banking Act vs Corporations Act) - Section 555 of the Corporations Act: all debts and claims proved in a winding up rank equally and must be paid proportionately if assets are insufficient. - The Banking Act modifies priority for ADIs. Subsection 13A(3) of the Banking Act sets the order in which assets in Australia are made available to meet liabilities in an insolvency: 1. any amounts owing to APRA for FCS payments made in respect of the ADI; 2. any amounts owing to APRA for administrative costs of activating the FCS payments made in respect of the ADI; 3. the ADI’s customer account liabilities in Australia that exceed FCS coverage; 4. any debt the ADI owes to the RBA; 5. any liabilities under the IDA or similar arrangement; 6. any other liabilities in the usual order of priority apart from Subsection 13A(3) (i.e., that under the Corporations Act). ### The Financial Claims Scheme (FCS): design, activation, funding, and recommendations - Purpose and mandate: - FCS established October 2008; included in the Banking Act as Part II, Division 2AA, Subdivision B – Declaration of ADI. - Administered by APRA; FCS is not a separate legal entity and has a narrow mandate limited to reimbursing protected depositors. - Activation and risks: - Determination of FCS application is declared by the Treasurer subsequent to APRA applying to the Federal Court for an insolvent ADI to be wound-up. - Two risks identified: - Activation at Treasurer’s discretion could cause depositor uncertainty and runs. - Courts could refuse APRA’s winding-up application, potentially creating a mismatch between FCS declaration and actual winding-up. - Recommendation: FCS should be automatically activated on APRA’s application to the court for the winding up. - Funding and moral hazard: - FCS is an ex post funded scheme backed by an AU$ 20 billion standing budgetary appropriation per declared ADI, with no clear plan to mobilize these funds. - No requirement for remaining open ADIs to contribute; disbursements expected to be recovered via asset liquidation recoveries or by a possible industry levy. - Consequences: - Absence of ADI contributions increases moral hazard and removes incentives (e.g., risk-adjusted premiums) to monitor risks. - Potential delays in depositor repayment due to lack of mobilization plan for the appropriation. - Recommendation: convert FCS to an ex ante deposit insurance scheme with: - a credible and adequate reserve fund invested with emphasis on liquidity and safety over return; - initial flat-rate periodic assessments on ADIs’ deposits, with objective to implement risk-based assessments over time; - consideration of an industry-funded resolution or stability fund as an alternative (either separate or combined with FCS), with an investment policy prioritizing liquidity and safety and prohibition on placing funds with member ADIs. - Coverage and operational features: - Initially guaranteed up to AU$ 1 million per account-holder, per ADI at introduction; reduced to AU$ 250,000 from February 1, 2012. - Term deposits existing on or before September 10, 2011, are covered up to AU$ 1 million until December 31, 2012 or their maturity, whichever comes first. - AU$ 250,000 coverage: fully covers around 99 percent of eligible depositors and over 50 percent of deposits by value. - Coverage is per depositor, per ADI, including trust accounts and corporate account-holders; all deposit accounts are covered, including legal entities and insiders. - Identified improvements: - Explicitly exclude insider deposits and offset deposits to overdue or matured loans. - Make it mandatory for ADIs to display the Government’s guaranteed deposits seal. - Require ADIs to implement Single Customer View (SCV) recordkeeping; APRA should ensure ADIs implement SCV on, or where possible, ahead of, the agreed timeframe of January 1, 2014. - FCS should plan competitive Purchase & Assumption (P&A) processes where other ADIs bid to assume failed ADI’s insured deposits and use failed ADI’s data processing system, premises and employees temporarily to ensure efficiency and continuity in insured depositor reimbursement; contingency cash-payment methods (checks drawn on RBA, electronic transfers) should remain as backups. ### Systemic importance, concentration, and need for credible resolution tools - Structure and concentration: - The four largest ADIs together hold approximately 76 percent of total banking assets. - Other sector composition: four mid-sized and a number of small Australian-owned ADIs, credit unions and building societies represent approximately 8 percent of banking sector assets; foreign-owned banks represent approximately 3 percent of banking sector assets; branches of foreign banks represent approximately 9 percent of banking sector assets. - Implications: - Ordinary liquidation proceedings may be unmanageable for large ADIs due to size and interconnectedness. - Failures can trigger depositor runs, borrowers ceasing loan payments, and credit crunches—necessitating steps to avert contagion. - Moral hazard is elevated: large ADIs benefit from perceived probability of government support; all ADIs pay nothing for FCS guarantee. - Policy recommendations: - Develop credible contingency plans and build system features ensuring ADIs bear costs of their own failures to improve market discipline on shareholders and large creditors. - Ensure solid but flexible arrangements for providing official financial support as a last resort. ### Developing credible contingency plans and recovery & resolution planning (RRP) - International context: - Post-global financial crisis emphasis on Recovery and Resolution Plans (RRP) for larger ADIs; resolvability of systemically important institutions is a Key Attributes focus. - APRA actions: - APRA initiated a pilot program in 2011 requiring the six largest ADIs to develop recovery plans per APRA specifications; intends to extend requirement to medium-sized ADIs. - Institution-specific resolution planning has not yet begun but has been discussed in CFR and actively considered by APRA. - Draft recovery plans submitted in late 2011; final plans, signed by CEO and board, are due by the middle of 2012. - Draft plans reported comprehensive approaches for restoring capital and liquidity under a severe scenario, including proposals to raise capital and sell subsidiaries and/or other businesses. *Italic: Source — _cr12310 (excerpt provided).* ### 60. Many countries require all banks to prepare contingency plans and submit them ### _cr12310 - 60. Many countries require all banks to prepare contingency plans and submit them ### Recovery and contingency planning - Many countries require all banks to prepare contingency plans and submit them to the supervisory authority; these plans are generally less detailed than Recovery Plans but should: - include funding sources in times of distress; and - ensure that the assets and documentation required to support collateralized borrowing from the RBA are always in good order. - Recommendation: APRA should determine whether extant liquidity and capital contingency plans are adequate for these purposes. - Recommendation: APRA should formalize the requirement for the larger ADIs to prepare recovery plans and commence resolution planning for these institutions. - Recommendation: APRA is encouraged to consider applying the resolvability framework applicable to G-SIFIs under the Key Attributes (institution-specific cross-border resolution agreements and resolvability assessments) or a version thereof to the larger ADIs. - APRA decision: APRA has decided to require medium-sized ADIs to also prepare Recovery Plans. - Recommendation: Consider extending a comparatively truncated contingency planning requirement to all ADIs, scaled to the ADI’s size and relative importance. - Supervisory action: APRA should annually check that ADIs’ required recovery and contingency plans are up-to-date and adequate as part of ongoing supervision. ### Private sector involvement and burden sharing - Principle: Private sector solutions that do not require public funds should be the favored approach to resolving ADIs, including systemically important ones. - Expectation: With encouragement or direction from APRA, ADI management and owners should attempt to: - raise capital from existing shareholders or prospective capital providers; - undertake sale of the whole institution or particular assets; or - voluntarily merge with another institution. - Constraint: Sale or merger prospects may be limited due to high concentration in the banking sector and balancing financial stability with competition concerns. - Recommendation: Use recovery plans to clarify potential private sector resolution options. - Tools to reinforce industry-bearing costs and reduce moral hazard (examples discussed): - an ex ante, industry-funded resolution fund; - statutory bail-in provisions in the legal framework; - a financial sector transaction tax; - capital surcharges on systemically important institutions to build capital with higher loss absorbency. - Note: These tools are not mutually exclusive; selection should be informed by lessons from RRPs. - Practical suggestion: In addition to converting the FCS to a pre-funded scheme, require larger ADIs to hold higher loss absorbent capital, leveraging existing infrastructure. - Footnote alternate: If political problems prevent converting the FCS to an ex ante scheme, an alternative could be a resolution or stability fund (or a combined fund (e.g., as in Sweden)) as long as it adheres to the priority of payments under Subsection 13A(3) of the Banking Act. ### Official financial support (Open Bank Assistance and alternatives) - Guiding principle: Authorities should have solid but flexible arrangements to provide public financial support to mitigate systemic risks when all else fails. - Forms of assistance (OBA and alternatives): - direct capital injections; - partial purchases of an ADI’s stocks or full nationalization; - direct loans to the ADI; - placement of government deposits with the ADI. - OBA is strongly discouraged except to mitigate systemic risk when the need for speedy action makes OBA virtually the only viable solution; if used it should be accompanied by strong conditions. - Objections to OBA: - poor financial decision (“pouring good money after bad”); - increases moral hazard and risk-taking by ailing banks; - political pressure can compel OBA when not warranted; - psychological entrapment with escalating financial cost. - Existing public support mechanisms under the current framework: - unsecured liquidity support from RBA with a government guarantee; - the FSSSA provides for standing budgetary authorization in tranches of funding of up to AU$ 20 billion each to troubled ADIs for recapitalization or similar purposes; - authorities could establish a bridge bank or an asset management company. - Bridge bank (P&A) observations: - can be a more effective and less risky alternative to nationalization for systemic banks; - typically receives deposits and good assets; uninsured deposits and other creditors’ liabilities often transferred; - allows continuation of regular business (new credit, rollovers); - leaves bad assets and contingent liabilities in bankruptcy/receivership rather than as sovereign liabilities; - may avoid capital injection if quick sale expectations and local requirements permit. - Limitations and mitigants for bridge banks: - bridge bank is temporary (country experience: somewhere along the lines of 1 year with possible extensions or up to 3 years with no extensions are common); - use only for systemic banks (though in external systemic shock, a bridge ADI accepting multiple non-systemic ADIs could be reasonable); - risk of increasing concentration in Australia’s banking sector if acquiring ADI is domestic—undesirable for moral hazard; - possible mitigation: managed divestiture (e.g., offer 20 percent ownership rights in annual offerings spanning five years) or a multi-acquirer process splitting branches among bidders. - Governance for government-owned ADIs: - Treasury should be prepared to establish a unit to own and control government-owned ADIs (bridge or nationalized), responsible for ownership/control policies, appointment of directors, and exit strategies; - APRA or the CFR should maintain a list of suitable ADI managers for appointment; candidates should undergo strict elimination interview and APRA approval before ministerial appointment. ### Cross-border resolution and crisis management - Cross-border risks: - material deterioration of a foreign bank with a branch in Australia or of a foreign parent of an ADI could cause upstreaming of profits or liquidity demands, transfer of risky assets to the Australian entity, or transfer of good assets out of the Australian entity. - APRA’s powers and suggested enhancements: - Subsection 11CA(2B) of the Banking Act allows APRA to direct a foreign bank operating through a branch in Australia not to transfer assets out of Australia. - It could be useful for APRA to have powers to: - take control of domestic assets of a foreign bank that operates through a branch in Australia via appointment of a statutory manager; - order a compulsory business transfer; or - apply to the Court for the domestic branch of a foreign bank to be wound up. - Such powers could support resolutions by foreign authorities or protect Australian financial stability. - Recognition and enforcement of foreign out-of-court resolution decisions: - Current process: enforce foreign judgment in Australia via recognition and enforcement under common law or the statutory regime (Foreign Judgments Act 1991 and Foreign Judgment Regulations 1992). - Limitation: registration under the statutory regime is streamlined only for judgments from certain prescribed foreign courts and for judgments that meet statutory criteria; where statute does not apply, common law requires Australian court proceedings. - Gap: decisions of foreign resolution authorities made out-of-court would not be recognized under current streamlined procedures. - Legislative options: - amend legislation so decisions of foreign resolution authorities made out-of-court are considered foreign judgments subject to streamlined recognition/enforcement; or - empower APRA to take domestic resolution measures that support and are consistent with foreign resolution measures. - Priority of payments in winding-up (current Subsection 13A(3) of the Banking Act): 1. any amounts owing to APRA for FCS payments made in respect of the ADI; 2. any amounts owing to APRA for administrative costs of activating the FCS payments made in respect of the ADI; 3. the ADI’s customer account liabilities in Australia that exceed FCS coverage; 4. any debt the ADI owes to the RBA; 5. any liabilities under the IDA or similar arrangement; and 6. any other liabilities in the usual order of priority apart from Subsection 13A(3) (i.e., that under the Corporations Act). - Recommendation: Amend the priority of payments so as not to discriminate against creditors on the basis of the location of their claim or jurisdiction where it is payable; current legislation results in certain customers with accounts in Australia receiving payment ahead of similar customers with accounts outside Australia. ### Annex highlights - Progress since the 2006 FSAP: - Significant improvements to the legal framework and active policy guidance development for bank resolution and crisis management. - Financial Claims Scheme put in place to protect depositors and insurance policy-holders. - Triggers for statutory management amended to allow pre-insolvency intervention in a failing ADI. - Existing and new provisions enable APRA to transfer the business of a failing ADI to a healthy ADI, a bridge bank, or an entity that is not regulated (e.g., an asset management company). - With growth of the four large ADIs, moral hazard has increased; further legislative improvements are advised to avoid moral hazard, enhance market discipline, and reduce potential fiscal cost. - The Trans-Tasman Body Council (TTBC) has developed cross-border resolution policy guidance and conducted a simulation exercise in 2011. ### Challenges to decisions taken by APRA (review mechanisms) - Administrative decisions by APRA are subject to three types of review at the request of the interested party and subject to conditions in the Banking Act: - Internal Review by APRA: - Certain decisions (identified in Part VI of the Banking Act) are subject to internal review within 21 days; - APRA must reconsider the decision and provide reasons to the applicant. - Merits Review by the Administrative Appeals Tribunal: - Certain decisions (identified in Part VI of the Banking Act) are appealable to the Administrative Appeals Tribunal within 28 days of finalization of the internal review by APRA; - The Administrative Appeals Tribunal may substitute its own decision for APRA’s decision; - A decision by the Administrative Appeals Tribunal is itself subject to appeal before the Federal Court. - Judicial Review: - All administrative decisions of APRA (other than most decisions of APRA in respect of the FCS) are subject to judicial review under the Administrative Decisions (Judicial Review) Act 1977; - Judicial review is limited to grounds that the decision was made for an improper purpose, there was a failure to provide natural justice, the decision was ultra vires, or the decision was motivated by bad faith; - The Court may set aside APRA’s decision but may not substitute its own judgment. *Excerpt from IMF staff report: _cr12310 - 60. Many countries require all banks to prepare contingency plans and submit them* ### Section 58 of the APRA Act provides that APRA, an APRA member, an APRA staff ### _cr12310 - Section 58 of the APRA Act provides that APRA, an APRA member, an APRA staff ### Legal immunity and related protections - Section 58 of the APRA Act provides that APRA, an APRA member, an APRA staff member, or an agent of APRA is not subject to liability to any person in respect of anything done, or omitted to be done, in the exercise or performance, or the purported exercise or performance, of powers, functions or duties conferred or imposed on APRA, an APRA member or an APRA staff member by law, provided the act or omission is not done in bad faith. - Similar protection is applicable to a statutory manager under Sections 14C and 14D of the Banking Act. - APRA employees (including FCS administration staff as APRA employees) enjoy adequate protection consistent with this legal framework. ### Decisions subject to internal review or merits review under Part VI of the Banking Act - Decisions explicitly subject to internal review or merits review include: - decisions to refuse authorization to carry on banking business, and decisions to impose or vary a condition on such authorization; - decisions to refuse to grant an exemption from certain requirements of the Banking Act; - decisions to revoke the authorization of a holding company; - decisions to make prudential standards in respect of a particular bank; - decisions to issue directions to an ADI based on one of the following triggers: - the ADI or a holding company has contravened a provision of: (i) the Banking Act, the Financial Sector (Collection of Data) Act 2001; or the First Home Saver Accounts Act 2008; - the ADI or a holding company has contravened a prudential requirement regulation or a prudential standard; - the ADI or a holding company is likely to contravene this Act, a prudential requirement regulation, a prudential standard, the Financial Sector (Collection of Data) Act 2001 or the First Home Saver Accounts Act 2008, and such a contravention is likely to give rise to a prudential risk; - the ADI or a holding company has contravened a condition or direction under the Banking Act or the Collection of Data Act; - decisions to remove an appointed auditor on the ground of the auditor being unfit or improper for the position (noting APRA may separately direct removal on other non-reviewable grounds); - decisions to remove and/or replace a director or senior manager of an ADI on the ground of the director/senior manager being unfit or improper for the position (noting APRA may separately direct removal on other non-reviewable grounds); - certain decisions of APRA in respect of covered bonds; - decisions by APRA in respect of permission to use restricted expressions, e.g., ‘bank’, ‘banker’ and ‘banking’. ### Decisions subject only to judicial review (not internal/merits review) - Certain key decisions in bank resolution and crisis management are not covered by Part VI and thus are subject to judicial review but not internal/merits review, including: - decisions to issue directions to an ADI on grounds other than those specified above; - decisions by APRA relating to the appointment and conduct of a statutory manager to a bank; - decisions by APRA directing banks to undertake a recapitalization; - decisions by APRA to formally investigate the affairs of an ADI. ### FCS comparison to Deposit Insurance Core Principles (Annex III) — principal findings - Public policy objectives - APRA must balance financial safety and efficiency, competition, contestability and competitive neutrality and protect depositors; these objectives flow through to FCS administration. - Mitigating moral hazard - Given extreme concentration of the Australian banking system and that ADIs are not required to pay ex ante or ex post premiums, the FCS effectually increases moral hazard in the financial sector. - Mandate - The Banking Law’s Subdivision B – Declaration of ADI makes FCS’s “paybox” mandate clear. - Powers - The Banking Act’s Part II, Division 2A, Subdivision B provides APRA with powers necessary to accomplish the narrow mandate of the FCS. - Governance - FCS is administered within APRA; APRA has operational independence but FCS lacks a Supervisory Board, mitigated by its narrow, ex post role. - Relationships with other safety-net participants - Administration within APRA provides economies of scale and facilitates information-sharing and coordination. - Cross-border issues - APRA appears to have adequate powers to share information on a cross-border basis. - Compulsory membership - FCS membership is mandatory for all ADIs incorporated in Australia; ADIs are not required to display certificates of membership. - Coverage - Coverage fully covers over 99 percent of depositors and over 50 percent of deposit amounts by value. - Coverage includes many entities often excluded in other schemes, including insiders and related parties. - There is no provision to offset a depositor’s claim against his/her matured or past-due loan. - A more granular analysis of deposit distribution to set coverage levels was not undertaken. - Transition from a blanket guarantee - Australia never had a blanket guarantee; FCS introduced with an initial AU$ 1 million “cap” in 2008, subsequently reduced to AU$ 250,000 in 2012, with no adverse public consequences. - Funding - FCS is a unique ex post system, with a AU$ 20 billion appropriation from the budget. - Banks pay no premiums; expenditures are expected to be recouped via recoveries on asset liquidation (with a Government option to impose an industry levy if shortfall). - In direct contravention of the principle that banks should bear primary responsibility, ADIs bear no explicit upfront cost for depositor protection, greatly increasing moral hazard. - Public awareness - ASIC’s website (and the Moneysmart website) contains information about the Government’s guarantee on deposits and the Government’s guaranteed deposits seal; display of the seal is voluntary per Guidelines. - Since FCS membership is mandatory, it is recommended that ADIs be required to display the Government’s guaranteed deposits seal. - Corporation Regulations require ADIs to disclose in product disclosure statements for protected accounts that the account holder may be entitled to a payment under the FCS and provide APRA’s contact details. - APRA should provide standard language for ADIs to use in deposit product descriptions and advertising to prevent implication of “better” coverage by some ADIs. - Legal protection - APRA employees administering FCS enjoy adequate legal protection consistent with deposit insurer protection in legislation. - Dealing with parties at fault - APRA has authority to pursue parties at fault in an ADI failure. - Early detection, intervention and resolution - APRA has powers for early detection and timely intervention which appear adequate. - Effective resolution processes - APRA has powers to facilitate resolution processes which appear adequate. - Reimbursing depositors - Lack of a single customer view (SCV) among banks would prevent FCS from beginning depositor reimbursement within 7 days of the trigger event. - APRA should require all banks to institute SCVs within a reasonable time frame. - APRA should consider a competitive process allowing other ADIs to bid to act as paying agent for insured deposits (experience has shown that assuming banks usually retain more than 70 percent of transferred deposits). - Recoveries - Australia has depositor preference and FCS, as subrogee, enjoys a higher claim priority than other unsecured creditors. ### International RRP (Annex IV) — summary of UK and US requirements - United Kingdom — Recovery plans - Recovery plans should include a sufficient number of credible options for a range of scenarios, options to return the firm to stability after capital or liquidity shortfalls, and appropriate governance processes (including triggers and intervention procedures). - Key elements include: integration with risk management, triggers, a comparative summary of recovery options, consistent option descriptions, list of key executives and roles, and internal/external communication plans. - United Kingdom — Resolution plans - Authority aims: ensure resolution without public financial support; minimize financial stability impact; minimize effect on depositors and consumers; enable decisions/actions in short timeframes (e.g., a ‘resolution weekend’); identify critical economic functions and ways to preserve or wind down functions; enhance international cooperation for G-SIFIs. - Key elements include: group structure diagram, high-level understanding of economic functions per legal entity, breakdown of group balance sheet by legal entity, understanding of major financial dependencies and interconnectedness, operational and other dependencies. - United States — Resolution Plan requirements - Each nonbank financial company supervised by the Federal Reserve Board and each bank holding company with total consolidated assets of $50 billion must periodically submit a resolution plan or “living will” including: protection of insured depository institutions from nonbank subsidiary risks; descriptions of ownership structure, assets, liabilities, contractual obligations; identification of cross-guarantees tied to securities; identification of major counterparties; process for determining collateral pledgees; and other information required by rule or order. - Proposed rules require strategic analysis of how the covered company can be resolved under Title 11 of the U.S. Code (the “Bankruptcy Code”) without posing systemic risk, including mapping business lines to material legal entities, credit and other exposures, funding, capital and cash flows, jurisdictions of operation, and supporting information systems. - The Dodd-Frank Act requires the Board to give due regard to national treatment and comparable home-country standards when applying section 165(d) to foreign entities. - Covered companies must submit: - (i) a plan for rapid and orderly resolution under the Bankruptcy Code (“Resolution Plan”); and - (ii) a report on credit exposures to and from other significant nonbank financial companies and bank holding companies (“Credit Exposure Report”). *Italic: IMF content unit _cr12310.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12310.pdf_