## _cr12313 - Summary Compliance with the Basel Core Principles—Detailed Assessments ## Source details **Canonical URL:** [_cr12313 - Summary Compliance with the Basel Core Principles—Detailed Assessments](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12313.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12313.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12313.pdf.json) --- ### Summary findings and high-level assessment - Very high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). - Australian banking system weathered the Global Financial Crisis relatively well due in part to: - concentration on a well performing domestic economy; and - a well-developed regulatory and supervisory structure. - Notable supervisory strengths: - strong risk analysis; and - focus on the responsibility of the Board. - Ongoing vulnerabilities: - banks' funding profiles could be a conduit of instability; - continued fragilities in the global system require ongoing development of supervisory standards and firm-based practices in risk management and liquidity. ### Institutional, macroeconomic setting and market structure — key statistics and features - Financial sector composition: - total financial sector assets: 330 percent of GDP; - ADIs (mostly banks): 60 percent of financial sector assets; - superannuation funds: 25 percent; - non-life insurance sector: 3 percent; - non-superannuation managed funds: 6 percent. - Stock market capitalization: - 80 percent of GDP at end-2011; - peak of 150 percent in mid-2007. - Concentration: - banking sector dominated by four large banks with broadly similar business models and reliance on offshore funding. - Profitability and capital: - aggregated after tax profits of the four major Australian banks: $11 billion in the year ended June 2012, up 1 percent from the previous year; - return on equity for the major banks: 15 percent; - aggregate Tier 1 capital ratio for Australian banks: 10.5 percent of risk-weighted assets as of June 2012 (up from 8.5 percent in 2009); - total capital ratio: 11.8 percent as of June 2012. ### Assessment context, methodology and scope - Assessment completed as part of an IMF Financial Sector Assessment Program (FSAP) in 2012; reflects framework in place as of completion date. - Authorities assessed against the Core Principles (CP) Methodology (Basel Committee, October 2006) using essential criteria (EC) and additional criteria (AC). - Compliance gradings: compliant (C); largely compliant (LC); materially noncompliant (MNC); noncompliant (NC); non-applicable. - Assessment focus: major banks and banking groups given systemic importance. ### Preconditions for effective banking supervision — macroeconomic and policy environment - Australia avoided a recession during the Global Financial Crisis. - Current account deficit fell to about 2½ percent of GDP in the first half of 2011 from an average of 4½ percent for the previous 15 years. - Economy expected to grow close to trend at 3-3.5 percent annually in 2012 and 2013. - Inflation expected to remain within target band of 2-3 percent over the medium term. - Government policy priority: returning to surplus by 2012/13. - Monetary policy: sizable policy space; output close to potential. ### Public infrastructure, institutional cooperation, and legal framework - Council of Financial Regulators (CFR): RBA (Chair), APRA, ASIC, Treasury — primary coordinating body; no separate legal personality or powers. - Trans-Tasman cooperation: Trans-Tasman Council on Banking Supervision (TTBC); 2005 reciprocal obligations legislation with New Zealand; Memorandum of Cooperation on trans-Tasman bank distress management signed 2010. - Legal system: common law basis; federal structure; federal law prevails where inconsistencies occur. - Accounting and reporting: IFRS implemented via Australian equivalent A-IFRS by AASB; Financial Reporting Council oversees AASB. ### Financial Safety Net and Financial Claims Scheme (FCS) - RBA: ultimate provider of liquidity; chair of CFR; key role in distress framework development. - FCS established October 2008 for ADIs and general insurers: - maximum payout to a depositor: $250,000; - previously $1 million between 2008 and 1 February 2012; - FCS is ex-post funded: payouts initially from Government, eventual shortfall met by levy on industry. - FCS activation: when APRA determines an ADI insolvent and applies to the Court to be wound up. ### Main findings — Objectives, independence, powers, transparency, and cooperation (CP1) - APRA responsibilities: - clear responsibility for supervision of banks. - Potential independence compromises: - Minister may give APRA a written direction about policies/priorities (must be laid before each House of Parliament within 15 sitting days); - prudential regulations made by APRA must be tabled in each House and may be disallowed within 15 sitting days. - APRA states neither provision has ever been invoked. - Disclosure and governance gaps: - No provision mandating public disclosure of specific reasons for termination of APRA Members. - Risk Management Committee and Audit Committee currently comprise internal and external members; recommendation to establish a separate audit committee with external members only. ### Licensing and structure (CPs 2–5) — issues and recommendations - General: regulatory approach to licensing and control broadly appropriate. - Issues: - legal permission for non-authorized, non-supervised entities to carry out deposit-like activities (section 11 exemptions); scale mostly de minimis but reputational risk to APRA. - change of control powers limited: Treasurer rather than APRA approves change of control for ADIs with assets exceeding one billion; Treasurer delegates to APRA under $1 billion. - Recommendation: - give APRA a binding right of veto on prudential grounds concerning change of control of ADIs irrespective of entity scale. ### Prudential regulation and requirements (CPs 6–18) — key findings - Capital framework: - historically conservative definition of capital; APRA intends to remain super‑equivalent with Basel III. - Pillar 2 and ICAAP: - APRA undertakes structured Pillar 2 assessment; reviews ICAAPs but places greater weight on PAIRS methodology. - banks expected to hold capital above APRA minimum; buffer size at firm’s discretion. - Risk management and stress testing: - supervisory emphasis on Board responsibility; need for stronger linkage of risk to capital and further development of stress testing. - Credit risk and provisioning: - well developed; APRA monitors industry-wide via risk register. - Liquidity and funding: - significant exposure to overseas wholesale funding at assessment time; APRA focused analytical work on funding issues; recommendation to broaden focus beyond funding dimension of liquidity risk and continue enhanced liquidity standards/reporting. - AML/CTF: - comprehensive regime introduced relatively recently; some banks yet to install sufficiently advanced technology. ### Methods of ongoing banking supervision (CPs 19–21) - Supervisory model: - risk-based supervisory model using PAIRS, SOARS, SAP; extensive IT support. - ratings mix concrete and judgmental factors; skilled staff required. - On-site supervision: - resource allocation modest; frequency and intensity increased since GFC but recommendation to extend duration of on-site reviews for deeper scrutiny. - Focus and evolution: - evolve risk methodology to be more forward-looking; embed common approaches across banking and insurance; develop Level 3 (conglomerate) approach to analyze cross-sector risks. ### Accounting, disclosure and external audit (CP 22) - Accounting and auditing: - high standards; IFRSs introduced in 2005; AUASB based on International Auditing and Assurance Standards Board. - APS 310 requires appointed auditors to provide assurance on prudential data and to report material misstatements to APRA. ### Corrective and remedial powers of supervisors (CP 23) - APRA’s toolkit includes: - supervisory actions, appointing investigators, issuing directions (e.g., cease/curtail business), removing directors/senior management/auditors, effecting compulsory transfer of business, revoking a license. - Legal enforcement: - directions non-compliance is an offence; APRA may intensify supervision, require remediation plans, or apply formal powers under the Banking Act. ### Consolidated and cross-border banking supervision (CPs 24–25) - Consolidated supervision: - APRA meets requirements for consolidated supervision (group risk management, solo and consolidated ratio calculations). - Recommendation: extend review scope to risks unique to non-banking activities carried on within groups (e.g., valuation/pricing in fund management). - Home-host relationships and information exchange: - Section 56 of APRA Act enables sharing confidential information with domestic and foreign supervisors; APRA has MOUs and participates in supervisory colleges. - APRA has formal cooperation arrangements with 22 overseas financial regulators. - APRA organizes calls with host supervisors at least annually, more typically every three to six months. - Over 2008/2011 APRA averaged 10 inspections per year of foreign operations of Australian banks. ### Selected compliance gradings (Table 1 — selected principles) - 1.1 Responsibilities and objectives: C - 1.2 Independence, accountability and transparency: LC - 1.3 Legal framework: LC - 2. Permissible activities: LC - 3. Licensing criteria: LC - 4. Transfer of significant ownership: MNC - 6. Capital adequacy: C - 7. Risk management: LC - 8. Credit risk: C - 14. Liquidity risk: LC - 18. Abuse of financial services (AML/CTF): LC - 24. Consolidated supervision: LC ### Recommended action plan (selected main recommendations) - 1.2 Independence, powers, transparency and cooperation: - explore avenues to ensure unambiguous independence within APRA; - mandate public disclosure of terms relating to termination of APRA Member appointments; - split Risk Management and Audit Committee; audit committee to comprise external members only. - 1.3 Legal framework: - provide APRA with sufficient delegated prudential powers to issue prudential regulations without additional Parliamentary procedures. - 2. Permissible activities: - revise section 11 exemption conditions for RFCs; recommend limiting exemptions to institutions reliant wholly on wholesale funding. - 3. Licensing criteria: - evaluate proposed directors and senior management independently and systematically at authorization. - 4. Transfer of significant ownership: - ensure APRA has legal right to prevent change of control of any ADI on prudential grounds; require annual reporting of major shareholders including ultimate beneficial owners. - 7. Risk management: - provide more guidance on enterprise risk management expectations, particularly capital planning related to risk; continue detailed APRA assessment and feedback. - 11. Exposure to related parties: - amend prudential standards to require Board approval for lending transactions with related parties above a threshold. - 14. Liquidity risk: - increase frequency and duration of on-site liquidity reviews; finalize enhanced liquidity regime and revised reporting for daily comparable data capability. - 17. Internal control and audit: - introduce explicit requirement for banks to have a permanent compliance function. - 18. Abuse of financial services: - set deadlines for banks to install necessary technology to meet AML/CTF obligations. - 24. Consolidated supervision: - extend onsite supervisory regime to include risks unique to non-banking activities as a matter of course. ### Authorities’ response — summary of disagreements - Authorities agree with very high compliance but disagree on some ratings and recommendations: - CP 3 (Licensing criteria): APRA asserts comprehensive licensing processes and independent checks; licensing commonly takes up to 18 months. - CP 7 (Risk management): authorities consider differences reflect bank performance, not supervisory failure. - CP 14 (Liquidity): authorities consider APRA’s approach comprehensive and contest a narrow definition of on-site reviews; banks can provide daily liquidity data if required. - CP 4 (Transfer of significant ownership): authorities strongly disagree with MNC rating; argue giving APRA a veto would conflict with Parliamentary sovereignty and existing FSSA and policy frameworks. - CP 1.3 (delegated powers): authorities disagree that APRA should be able to issue prudential regulations without Parliamentary tabling, noting parliamentary scrutiny is an accountability element. ### Detailed assessments — Principle 1 (selected findings) - Legal basis and objectives: - Banking Act 1959 and APRA Act provide statutory duties; Section 12(1) duty to protect depositors and promote financial system. - Section 11AF empowers APRA to make prudential standards with force of law; APRA issues non-binding Prudential Practice Guides (PPGs). - Independence and accountability: - APRA established as independent statutory authority; governed by three full-time Members appointed by Governor-General on advice of Treasurer. - Ministerial direction power exists (has never been used). - Termination and governance: - Section 25 sets objective grounds for termination of APRA Members; no provision for public disclosure of specific reasons for termination; no Member has ever been dismissed. - Recommendation: require public disclosure of specific reasons for termination of APRA Members. - Current Risk Management and Audit Committee membership: external chair (casting vote), one external member, one APRA Executive Group Member, one executive General Manager (one year rotation); recommendation to split committees and have Audit Committee comprised of external members only. ### Financing, resources and operational capacity (Principle 1(4)–EC4) - APRA funding and budgets: - APRA is self-funding via levies; receives Special Appropriations for particular matters. - Examples of Special Appropriations: - 2008: $45m payable over four years. - State budget 2012/13: APRA allocated $82.4m Special Appropriation payable over four years. - APRA budgets (excluding Special Appropriation): - $109m in 2008/09 - $121m in 2009/10 - $120m in 2010/11 - $120m in 2011/12 - 2012/13 budget fixed at $125m which includes first tranche ($18.9m) of the $82.4m Special Appropriation. - Staffing and training: - staff turnover in operational divisions: nine percent in 2011 (below longer term average ~14 percent); - APRA places heavy emphasis on training; expenditure places APRA in the 90th quartile of private and government organizations in Australia. - Supervisory capacity: budget allows domestic and overseas onsite review; assessors recommend sustained focus on recruitment/retention as supervisory intensity increases. ### Information sharing and confidentiality (Principle 1(6) and related) - Section 56 of the APRA Act: - enables APRA to provide confidential information to domestic regulators (ASIC, RBA, AUSTRAC) and foreign supervisors, subject to safeguards. - Section 56 exempts such confidential information from Freedom of Information Act, 1982 disclosure. - MOUs and coordination: - APRA has MOUs with domestic agencies and with 22 overseas regulators; Council of Financial Regulators MOU facilitates crisis coordination. - Assessment: Compliant for cooperation and information sharing. ### Permissible activities and use of the term “bank” (Principle 2) - Use of term “bank” restricted; APRA will authorize use only when Tier 1 capital ≥ $50m. - Section 11 exemptions permit RFCs and religious charitable development funds to take deposits without APRA supervision: - RFCs total funds taken estimated approximately AUD53 billion; less than a tenth is retail. - Religious charitable development funds size approximately AUD4.3 billion; exemption expressed to expire 27 June 2013 (review underway). - Public register: APRA publishes list of ADIs and authorized NOHCs. - Assessment: Largely Compliant; recommendation to reconsider section 11 exemptions. ### Licensing authority and criteria (Principle 3) — findings - APRA empowered under Section 9 to grant/revoke authority to conduct banking business; publishes ADI Authorisation Guidelines. - Minimum initial capital: - ADI Authorisation Guidelines: proposed new banks must have at least $50 million in Tier 1 capital unless a branch of a foreign bank. - Fit and proper requirements: - APS 520 (to be superseded by CPS 520) sets fit and proper policies; APRA may undertake independent checks but not routinely. - Assessment: Largely Compliant; recommendation for routine systematic independent checks on directors and senior management at authorization. ### Transfer of significant ownership and change of control (Principle 4) — key concerns - FSSA limits individual shareholding to 15 percent of voting shares; acquisitions > 15 percent require Treasurer approval (delegated to APRA for ADIs with assets < AUD 1 billion). - APRA lacks legal prudential veto for change of control of large ADIs (assets > $1,000 million); assessed as Materially Non Compliant due to this restriction and absence of routine reporting of major shareholders and ultimate beneficial owners. - Recommendations: - grant APRA a clear binding prudential veto over change of control irrespective of entity scale; - require annual reporting of identities of beneficial owners and major shareholders and prompt notification of material adverse developments concerning major shareholders. ### Capital adequacy (Principle 6) - Prudential capital requirements set in APS 110 and APS 111: - PCR minimum: eight percent total capital; four percent Tier 1 at all times. - APRA applies consolidated and standalone PCRs; has power to set higher PCRs. - Internal models subject to APRA approval (APS 113, APS 115, APS 116, APS 117). - Assessment: Compliant. ### Risk management (Principle 7) — overview - APRA standards: APS 310, APS 222, APS 510 central to risk management requirements. - PAIRS (Probability and Impact Rating System) and SOARS determine supervisory intensity; PAIRS separates inherent risk and management/control. - ICAAP requirements under APS 110; APRA reviews ICAAPs but finds some ICAAPs insufficiently mature. - Assessment: Largely Compliant; need for stronger capital‑risk linkage and enhanced stress testing. ### Credit risk and provisioning (Principles 8–9) - APS 220 governs credit quality, impairment and provisioning; on- and off-balance sheet exposures included. - Prudential reporting: ARF 220.0, ARF 220.5, auditors provide assurance under APS 310. - Provisioning approach: APRA expects provisions and GRCL adequate to absorb credit losses and may require higher provisioning than accounting (allows prudential recognition beyond accounting). - Assessment: Compliant. ### Large exposures and related-party exposures (Principles 10–11) - APS 221 large exposures: - large exposure defined as exposure ≥ 10 percent of a bank's capital base; - aggregate limits: 25 percent of capital base for non-government/non-bank unrelated parties; 50 percent for unrelated banks. - APS 222 related-entity framework: - definition excludes individuals/natural persons; corporate law complements restrictions but gaps exist. - Assessments: - Principle 10: Compliant. - Principle 11: Largely Compliant; recommendation to widen definition of related parties to capture connected individuals and strengthen governance on connected lending. ### Country and transfer risk; international exposures (Principle 12) - Offshore exposures represented 22 percent of industry total assets as at June 2011. - Major international exposures concentrated in New Zealand, United Kingdom and United States (approximately 60 percent of international claims). - APRA receives quarterly ARF 231.3 International Exposures and applies more intensive supervision to advanced banks reporting significant exposures. - Assessment: Compliant; recommendation to reconsider prudential requirements specifically directed at country and transfer risk. ### Market, liquidity, operational and IRRBB risk (Principles 13–16) - Market risk (APS 116): Compliant; internal models accredited; onsite reviews at least every three years for trading exposures. - Liquidity (APS 210): Largely Compliant: - scenario analysis or minimum liquidity holding approaches; boards must approve liquidity strategies; APRA proposed Basel III alignment mid-2012; - concerns: frequency and depth of on-site liquidity reviews; need for reliable, comparable daily liquidity reporting; CLF introduced by RBA to assist LCR compliance in 2015. - Operational risk (APS 310, APS 231, APS 232, APS 114/115): Compliant. - IRRBB (APS 117): Compliant; advanced banks required to model 99 percent confidence over one year; standardized banks report ±200bp parallel move (ARF 117.0). ### AML/CTF and abuse of financial services (Principle 18) - Legal and institutional framework: - AUSTRAC: AML/CTF regulator and FIU under AML/CTF Act 2006; banks subject to reporting obligations (SMRs), customer identification, record keeping. - Correspondent banking requirements: Sections 95–98 of AML/CTF Act and Chapter 3 of AML/CTF Rules mandate due diligence and prohibit shell banks. - Findings: - AUSTRAC inspects banks on a risk basis; major banks inspected twice yearly. - Some banks required to upgrade technology; manual workarounds remain in some cases. - 2010/11: AUSTRAC received 44,775 reports of suspicious matters and transactions. - Assessment: Largely Compliant. ### Supervisory approach, tools, on- and off-site supervision (Principles 19–20) - Supervisory methodology: - PAIRS → SOARS → SAPs; PAIRS is a 41-point logarithmic scale separating inherent risk and management/control. - offsite Quarterly Risk Reviews (QRR); industry dashboards and risk register; Industry Analysis unit embedded. - On-site supervision: - integrated frontline supervisors supported by specialists; prudential reviews cycle determined by PAIRS impact rating (full prudential review minimum three year cycle in many cases). - examples: credit risk themed on-site review might take 5 days; liquidity reviews typically 2-3 days. - recommendation: allocate more resources to longer, deeper on-site reviews for assurance. - Assessment: - Principle 19: Compliant. - Principle 20: Compliant. ### Reporting, data collection, auditors and supervisory use of external experts (Principle 21 & 22) - Legal powers: - Section 62 of Banking Act and FSCODA enable APRA to collect required information on solo and consolidated basis. - Reporting systems: - D2A electronic submission with validation; post-submission data quality checks within first two weeks. - Auditors: Section 16BA/16B require auditors to notify APRA of insolvency concerns; APS 310 requires appointed auditors to provide assurance on prudential data. - Accounting and disclosure: - Banks required to publish annual and half-yearly reports under Corporations Act 2001; IFRS-based accounting applied. - Assessment: - Principle 21: Compliant. - Principle 22: Compliant. ### Corrective and remedial powers, resolution and crisis coordination (Principle 23) - APRA powers include issuing directions, appointing statutory managers, effecting business transfers, applying for wind-up, and revoking licenses. - Early engagement: APRA issues written requirements and follows up with progress reports; breach notifications required under Section 62A. - Crisis coordination: APRA would activate internal Financial Crisis Management Plan and consult CFR. - Assessment: Compliant. ### Home-host relationships (Principle 25) — summary - APRA’s framework: - Section 56 enables exchange of confidential information; APRA uses MOUs and supervisory colleges; participates in Trans-Tasman Council. - APRA will not authorize a foreign bank without home supervisor consent and expects consolidated supervision from home authorities. - Foreign bank branches in Australia prohibited from taking retail deposits less than A$250,000. - Key statistics: - APRA has formal cooperation arrangements with 22 overseas financial regulators. - Trans-Tasman Council established in 2005. - APRA averaged 10 inspections per year of foreign operations over 2008–2011. - Assessment: Compliant. *Source: Financial Sector Assessment Program (IMF), assessment completed in 2012.* ### 1. Summary Compliance with the Basel Core Principles—Detailed Assessments .................14 ### _cr12313 - 1. Summary Compliance with the Basel Core Principles—Detailed Assessments .................14 ### Summary findings and high-level assessment - Australia has a very high level of compliance with the Basel Core Principles for Effective Banking Supervision (BCPs). - The Australian banking system was more sheltered than a number of other countries and weathered the Global Financial Crisis relatively well, in part due to: - concentration on a well performing domestic economy; and - a well-developed regulatory and supervisory structure. - Notable strengths of the Australian supervisory approach: - strong risk analysis; and - focus on the responsibility of the Board. - Ongoing vulnerabilities: - banks' funding profiles could be a conduit of instability; - continued fragilities in the global system require ongoing development of supervisory standards and firm-based practices in risk management and liquidity. ### Assessment context and introduction - The assessment was completed as part of a Financial Sector Assessment Program (FSAP) undertaken by the International Monetary Fund (IMF) during 2012. - The assessment reflects the regulatory and supervisory framework in place as of the date of completion and is not intended to assess international policy decisions still to be decided. - The assessment focused on the major banks and banking groups given their systemic importance. ### Information and methodology used for assessment - The Australian authorities were assessed according to the Core Principles (CP) Methodology issued by the Basel Committee on Banking Supervision in October 2006. - The assessment used essential and additional assessment criteria: - essential criteria (EC) are the only elements on which to gauge full compliance with a core principle; - additional criteria (AC) are suggested best practices and are commented on but not reflected in the grading. - Compliance grading categories used: compliant; largely compliant; materially noncompliant; noncompliant; and non-applicable. - Grading definitions (summary): - compliant: all essential criteria met without significant deficiencies; - largely compliant: only minor shortcomings, clear intent to achieve full compliance within a prescribed period; - materially noncompliant: severe shortcomings, evidence supervision has not been effective; - noncompliant: not substantially implemented, several essential criteria not complied with, or supervision manifestly ineffective. - The assessment reviewed laws, rules, guidance, held extensive meetings with APRA, the RBA, the Treasury, banking sector participants, and reviewed supervisory documents and files. - The assessors comprised Michael Deasy and Katharine Seal. ### Institutional, macroeconomic setting and market structure — key statistics and features - Financial sector size and composition: - total financial sector assets: 330 percent of GDP; - ADIs (mostly banks): 60 percent of financial sector assets; - superannuation funds (including investment-linked superannuation written by life insurance companies): 25 percent; - non-life insurance sector: 3 percent of financial sector assets; - non-superannuation managed funds: 6 percent. - Stock market capitalization: - 80 percent of GDP at end-2011; - peak of 150 percent in mid-2007. - Concentration and structural risks: - banking sector dominated by four large banks with broadly similar business models and reliance on offshore funding. - Profitability and capital: - aggregated after tax profits of the four major Australian banks: $11 billion in the year ended June 2012, up 1 percent from the previous year; - return on equity for the major banks: 15 percent (steady over the past two years); - aggregate Tier 1 capital ratio for Australian banks: 10.5 percent of risk-weighted assets as of June 2012, up from 8.5 percent in 2009; - total capital ratio: 11.8 percent as of June 2012. - APRA actions and stance: - APRA intensified supervisory practices post-crisis and moved to early, conservative adoption of key aspects of the Basel III capital and liquidity framework; - APRA has required higher quality capital and an accelerated timetable for meeting minimum Tier 1 capital requirements. ### Preconditions for effective banking supervision — macroeconomic and policy environment - Macroeconomic performance and outlook: - Australia avoided a recession during the Global Financial Crisis and continued to thrive; - current account deficit fell to about 2½ percent of GDP in the first half of 2011 from an average of 4½ percent for the previous 15 years; - economy expected to grow close to trend at 3-3.5 percent annually in 2012 and 2013; - inflation expected to remain within the authorities' target band of 2-3 percent over the medium term; - government policy priority: returning to surplus by 2012/13. - Monetary policy: - Australia retained sizable monetary policy space and output was close to potential. ### Public infrastructure, institutional cooperation, and legal framework - Policy coordination: - Council of Financial Regulators (CFR) is the primary coordinating body for the RBA (Chair), APRA, ASIC, and Treasury; - CFR objectives include promoting stability of the Australian financial system and contributing to efficiency and effectiveness of financial regulation; - CFR has no separate legal personality or powers beyond member agencies. - Trans-Tasman cooperation: - Trans-Tasman Council on Banking Supervision (TTBC) includes Australian and New Zealand Treasuries, the RBA, the Reserve Bank of New Zealand, and APRA; - 2005 legislation implemented reciprocal obligations between APRA and the Reserve Bank of New Zealand; - TTBC, with ASIC, signed a Memorandum of Cooperation on management of trans-Tasman bank distress in 2010 and started developing guidance on joint resolution of trans-Tasman bank distress in 2011. - Legal system and federal structure: - common law basis derived from the United Kingdom; - federal system with powers distributed between the Commonwealth and six States; - where inconsistencies occur, federal law prevails. - Accounting and reporting: - Australia implemented International Financial Reporting Standards (IFRS); - accounting standards are made by the Australian Accounting Standards Board (AASB) which issues Australian equivalent A-IFRS; - the Financial Reporting Council oversees the AASB. ### Effective market discipline and reporting frameworks - Corporate financial reporting requirements are contained in the Corporations Act. - Australian auditing standards are made by the Auditing and Assurance Standards Board (AUASB) and are based on the International Auditing and Assurance Standards Board. *Source: Financial Sector Assessment Program (IMF), assessment completed in 2012.* ### 21. Australia has a well-developed capital market. Its stock exchange, ASX, functions ### _cr12313 - 21. Australia has a well-developed capital market. Its stock exchange, ASX, functions ### Capital markets and corporate governance - ASX functions primarily as a trading operator, clearing house and settlements system facilitator. - ASX responsibilities include: - overseeing compliance with its listing rules, - promoting standards of corporate governance among listed companies, - educating retail customers, - placing particular emphasis on transparency and disclosure. - Overall, capital markets corporate governance systems comply with the OECD Principles of Corporate Governance. - Market structure: - Listed equity market: over 2,200 companies listed on the exchange. - Debt market: relatively underdeveloped. - Over-the-counter market: active but small by international standards. ### Financial Sector Safety Net - Reserve Bank of Australia (RBA): - ultimate provider of liquidity to the financial markets, - fosters lower inflation and sustainable growth, - seeks to ensure the payment system is safe and robust, - plays a key role in developing a framework for dealing with financial institutions in distress, - chairs the CFR. - Council (CFR) objectives include: - promotion of the stability of the Australian financial system, - contribution to the efficiency and effectiveness of financial regulation. ### Financial Claims Scheme (FCS) - Established in October 2008 for authorized deposit-taking institutions (ADIs) and general insurers. - Characteristics: - deposit protection scheme providing prompt access to deposits if institutions fail, - FCS is activated for an ADI when APRA has determined that the ADI is insolvent and has applied to the Court to be wound up. - Payout limits and funding: - Maximum payout to a depositor is $250,000. - It had been $1 million between 2008 and 1 February 2012 to foster confidence in the banking system. - The FCS is ex-post funded: - payouts will initially come from the Government, - any eventual shortfall will be met by a levy on the industry. ### Main Findings — Objectives, independence, powers, transparency, and cooperation (CP1) - APRA responsibilities and governance: - APRA has clear responsibility for the supervision of banks in Australia. - Two areas may potentially compromise APRA's independence: - The Minister may give APRA a written direction about policies it should pursue, or priorities it should follow, in performing or exercising any of its functions or powers. Such a direction: - may only be given once the Minister has given APRA notice in writing of the proposed direction, and given the Chair of APRA an adequate opportunity to discuss with the Minister the proposed direction, - must be laid before each House of Parliament within 15 sitting days. - Prudential regulations made by APRA must be tabled in each House of Parliament and may be disallowed: a notice of motion to disallow the prudential standards may be given within 15 sitting days; if the notice of motion is passed within 15 sitting days after the giving of the notice, the regulations will cease to have effect. - APRA has stated that neither provision has ever been invoked and that they are not likely to be, but they have the potential to compromise independence. - Disclosure and governance gaps: - No provision mandating the public disclosure of the specific reasons for the termination of the appointment of APRA Members. - APRA‘s Risk Management Committee and Audit Committee membership comprises both internal and external members; recommendation: establish a separate audit committee with external members only. ### Licensing and structure (CPs 2–5) - General assessment: - Australian regulatory approach to licensing and control is broadly appropriate and clearly articulated. - Issues and recommendations: - Australian law permits non-authorized, non-supervised financial companies to carry out deposit-like activities: - number of such institutions is small and scale mostly de minimis, - major global institutions benefit from this exemption and deposit-like facilities are being offered to the public, - APRA is subject to an unnecessary reputational risk from this source. - Legal restriction on APRA's powers on change of control of ADIs: - The Treasurer, rather than APRA, has approval power for change of control for ADIs whose asset-size exceeds one billion. - The Treasurer is legally responsible for approving the holding of a stake in any ADI in excess of 15 percent. - The Treasurer delegates approval authority to APRA where the ADI's assets are less than $1 billion, and takes advice from APRA for ADIs with assets greater than $1 billion. - Recommendation: give APRA a binding right of veto on prudential grounds concerning change of control of ADIs irrespective of the scale of the entity. ### Prudential regulation and requirements (CPs 6–18) - Capital framework: - Australia has historically adopted a very conservative definition of capital. - APRA intends to remain super-equivalent to the Basel standard with the advent of revised Basel III. - As a result, capital levels in Australian banks can appear low relative to peers; strong and comparable disclosure standards are important. - Pillar 2 and ICAAP: - APRA undertakes a well-structured Pillar 2 assessment. - APRA reviews firms' ICAAPs but does not use them as the sole or main determinant of minimum capital; APRA places greater weight on its PAIRS rating methodology. - Rationale: supervisor’s view that banks' ICAAP process is not sufficiently mature or robust. - Banks are required to hold capital above APRA minimum level; size of buffer is at the firm’s discretion. - Risk management and stress testing: - APRA's supervisory approach emphasizes Board responsibility for management and oversight. - Processes embedding risk management are still seasoning; not all firms have achieved the same level of capability. - Firms need to strengthen the work on relating risk to capital; stress testing practices need further development. - Credit risk and provisioning: - Credit risk management, including impaired assets and provisioning, are well developed. - APRA monitors emerging credit risk issues industry-wide via a risk register. - Well-established policy on large exposures is under review. - Liquidity and funding: - Australian banking system at assessment time showed significant exposure to overseas wholesale funding. - APRA has focused analytical work on funding issues but should avoid too narrow a focus on funding dimension of liquidity risk. - Work on liquidity standards including contribution to Basel III and intensified off-site data analysis needs to continue. - Anti-money laundering / terrorism financing: - Comprehensive regime introduced relatively recently. - Some banks have yet to introduce sufficiently advanced technology systems to eliminate possible errors using less sophisticated means. ### Methods of ongoing banking supervision (CPs 19–21) - Supervisory model and systems: - APRA has a thorough understanding of individual banks and the banking system. - Operates a risk-based supervisory model informed by peer review and supported by an extensive, flexible IT system. - Rating methodology supported by internal guidance and criteria subject to regular review. - Ratings mix concrete and judgmental factors; skilled staff required for sound supervisory discretion. - Focus and evolution: - Continued evolution of the risk methodology to enhance forward-looking dimension is important. - APRA seeks to embed a common approach to banking and insurance sectors; issuance of joint prudential standards where possible (e.g., corporate governance). - APRA should focus more on analyzing relationships of risks between sectors; development of the “Level 3” (conglomerate) approach should stimulate this work. - On-site supervision: - On-site review resource allocation is modest. - Frequency and intensity of direct on-site supervision has been increased since the GFC and this heightened level needs to be maintained. - Recommendation: consider extending the duration of on-site reviews to fully scrutinize institution’s understanding and risk management practices. ### Accounting and disclosure (CP 22) - Standards and implementation: - Accounting and Auditing Standards set to a very high standard and based on best international practice. - IFRSs introduced in 2005. - Australia has adopted the audit standards promulgated by the International Auditing and Assurance Board. ### Corrective and remedial powers of supervisors (CP 23) - APRA’s toolkit includes: - standard supervisory actions, - appointing a person to investigate and report on financial matters, - issuing directions (e.g., directing banks to cease or curtail business), - removing directors, senior management or auditors, - effecting a compulsory transfer of business, - revoking a license. ### Consolidated and cross-border banking supervision (CPs 24–25) - Consolidated supervision: - APRA meets the requirements for effective consolidated supervision (group risk management structures, group-wide breaches, solo and consolidated ratio calculations). - Recommendation: consider extending scope of reviews to cover risks unique to non-banking activities carried on within the group (e.g., valuation of assets/pricing of units in fund management). - On-site review scope: - APRA’s onsite review regime does not extend as a matter of course to review risks unique to non-bank activities. ### Table 1 — Summary Compliance with the Basel Core Principles — Selected principle gradings and comments - 1.1 Responsibilities and objectives: C - 1.2 Independence, accountability and transparency: LC - APRA’s independence could be compromised by Ministerial direction powers and lack of mandated public disclosure on APRA Member termination; internal membership on audit committee noted as contrary to good governance. - 1.3 Legal framework: LC - Prudential regulations by APRA may be tabled and disallowed by Parliament. - 2. Permissible activities: LC - Existence permitted for non-authorized, non-supervised deposit-taking institutions with deposit-like facilities offered to the public. - 3. Licensing criteria: LC - APRA does not routinely undertake independent checks on new directors or shareholders under fit and proper criteria. - 4. Transfer of significant ownership: MNC - APRA’s powers to object to change of control are restricted for systemic banks (Treasurer authority). - 6. Capital adequacy: C - Conservative capital definition to be maintained through Basel III transition. - 7. Risk management: LC - Need for stronger linkage of capital to risk across firms. - 8. Credit risk: C - Well articulated and practiced approach to credit risk. - 14. Liquidity risk: LC - Significant exposure to overseas wholesale funding; progress made on liquidity regime but more data and on-site inspection needed. - 18. Abuse of financial services: LC - Recent AML/CFT regime; some banks lack sufficiently advanced technology systems. - 24. Consolidated supervision: LC - Onsite review regime does not routinely cover non-bank activity risks. *Source: IMF country report content provided in the supplied PDF excerpt.* ### 25. Home-host relationships ### 25. Home-host relationships ### Aggregate assessment - Aggregate: Compliant (C) – 20, Largely compliant (LC) – 9, Materially noncompliant (MNC) – 1, Noncompliant (NC) – None (note: CP 1 is divided into six component for this analysis.) ### Recommended action plan (selected main recommendations) - 1.2 Independence, powers, transparency and cooperation - APRA should explore with the Australian Government possible avenues which would ensure unambiguous independence within APRA. - Legal provision should be made to mandate the public disclosure of the terms relating to the termination of appointment of an APRA Member. - APRA‟s Risk Management and Audit Committee should be split in two and membership of the new audit committee comprised solely of external members. - 1.3 Legal framework - Provide APRA with sufficient delegated powers, clearly circumscribed to the prudential sphere, to ensure that the supervisor can issue prudential regulations without additional Parliamentary procedures. - 2. Permissible activities - Revise the conditions for exemption from section 11 of the Banking Act for RFC to ensure, at a minimum, that such exemptions be limited to institutions reliant wholly on wholesale funding. - 3. Licensing criteria - Evaluate proposed directors and senior management as to expertise and integrity at point of authorization, on a complete and systematic basis, independently from the information provided by the institution. - 4. Transfer of significant ownership - Ensure that APRA has the legal right to prevent a change of control of any ADI on prudential grounds. - Ensure that requirements are in place for a bank or ADI to notify the supervisor, at a minimum, on an annual basis of major shareholders including ultimate beneficial shareholders. - 7. Risk management - Put in place more guidance or regulation on APRA expectations for enterprise risk management, in particular with respect to capital planning related to risk. - Continue to subject banks to regular detailed APRA assessment and feedback to achieve appropriate levels of practice in firms. - 11. Exposure to related parties - Review and amend prudential standards to ensure that all lending transactions with related parties – both entities and individuals--above a threshold (whether at normal terms or not) are approved by the board. - 14. Liquidity risk - Increase the frequency and duration of on-site review of liquidity risk management. - Finalize the program of enhanced liquidity risk regime, including revised reporting standards to ensure that firms are capable of providing accurate, system wide, comparable data on a daily basis if required and ensuring the general principles of liquidity risk management are applied to and adhered to by all institutions. - 17. Internal control and audit - Introduce an explicit requirement for banks to have a permanent compliance function. - 18. Abuse of financial services - Banks should be given a deadline within which they must install the necessary technology to enable them to meet effectively the obligations under the AML/CTF legislation. - 24. Consolidated supervision - APRA should extend its onsite supervisory regime to include an examination of risks unique to non-banking activities carried on within the bank/group as a matter of course e.g., valuation of assets/pricing of units in the case of fund management activity. ### Authorities’ response to the assessment - General - The Australian authorities express appreciation to the IMF and assessment teams and state Australia is strongly committed to the FSAP process. - Australia shares the view that it has a very high level of compliance against the Basel Core Principles but disagrees with some ratings. - Authorities emphasize that assessments should reflect outcomes of the supervisory framework; they cite the strength of Australia‟s banking system during the global financial crisis as evidence of robust supervision. - Specific Core Principles where authorities disagree with the IMF assessment - CP 3 Licensing criteria - APRA asserts it undertakes a comprehensive and thorough evaluation of licence applications, including independent checks, with licensing commonly taking up to 18 months. - Authorities state they are not aware of evidence of deficiencies in licensing outcomes. - CP 7 Risk management - IMF assessed Australia as „Largely Compliant‟ because not all banks have achieved an appropriate standard of risk management. - Authorities contend this reflects bank performance rather than supervisory failure, and note APRA‟s role is to raise risk management standards and to take action where inadequate. - CP 11 Exposure to related parties - Assessment finds a narrow gap; authorities state no evidence of issues in practice and that APRA‟s framework and powers address potential issues. - CP 14 Liquidity - Authorities consider APRA‟s comprehensive approach meets the Core Principle and argue IMF used a narrow definition of „on-site reviews.‟ - Authorities note banks can provide accurate liquidity data on a daily basis if required and that Basel III reporting will standardize liquidity reporting formats, including daily reporting capacity. - CP 18 Abuse of financial services - IMF cited need for increased technology as basis for „largely compliant‟ rating; authorities state banks are directing significant resources to AML/CTF systems and are comfortable with the pace of technology upgrades. - CP 24 Consolidated supervision - Authorities consider essential criteria met through APRA‟s supervisory practices and note APRA routinely evaluates risks from non-banking activities and conducts on-site reviews where material. - CP 4 Transfer of significant ownership - Authorities have serious concerns about the justification for the „Materially Non-Compliant‟ rating. - They argue the definition of MNC does not fit Australia‟s outcome; longstanding Government policy and the Financial Sector (Shareholdings) Act 1998 help manage transfer risks. - Authorities state giving APRA the legal right to prevent a change of control of any bank on prudential grounds would amount to giving APRA a power of veto over the Government, conflicting with Parliamentary sovereignty. - CP 1 Objectives, autonomy, powers and resources - Authorities disagree with recommendations to ensure "unambiguous independence within APRA," asserting APRA is already unambiguously independent, a statutory authority at arm‟s length from Government with substantial statutory and operational independence. - On the recommendation under CP 1.3 that APRA be provided with delegated powers to issue prudential regulations without additional Parliamentary procedures, authorities disagree: - They state APRA has extensive power to set legally enforceable standards. - Parliamentary scrutiny of APRA‟s prudential standards is an essential element of accountability and Parliamentary sovereignty. - APRA‟s prudential standards are legislative instruments under the Legislative Instruments Act 2003 and are legally binding; a breach of a prudential standard is a breach of the law. No prudential standard has ever been disallowed by Parliament. ### Detailed assessment — Principle 1 (selected findings) - Principle 1 summary - Principle 1: Objectives, autonomy, powers, and resources. Effective supervision requires clear responsibilities and objectives, operational independence, transparent processes, sound governance, adequate resources, and arrangements for information sharing and confidentiality. - Principle 1(1) Responsibilities and objectives — Assessment: Compliant - EC1 Findings - Principal laws: Banking Act 1959 (as amended) and the Australian Prudential Regulation Authority Act 1998 (as amended) (APRA Act). - Section 12 (1) of the Banking Act: duty of APRA "to exercise its power and functions for the protection of depositors of authorized deposit-taking institutions (ADIs) and for the promotion of the financial system in Australia." - ADIs comprise banks, building societies, credit unions and a small number of specialized service providers; all are subject to the same supervisory regime. - APRA Act established APRA as body responsible for prudential supervision; APRA seeks to avoid actions likely to have a detrimental effect on financial system stability in New Zealand given the four major Australian banks have almost a 90 percent share of the banking system assets in New Zealand. - Conduct of business regulation is by ASIC; Reserve Bank of Australia handles monetary policy, financial system stability and payments system safety/efficiency; AUSTRAC is AML regulator and financial intelligence unit. - EC2 Findings - Section 11AF of the Banking Act gives APRA power to make prudential standards for ADIs and NOHCs; prudential standards have the force of law and ADIs/NOHCs are required to comply. - Section 11AF allows standards to impose different requirements in different situations or for classes or specific ADIs. - APRA issues prudential practice guides (PPGs) that provide non-enforceable, non-binding guidance. - EC3 Findings - APRA monitors domestic and international developments and works closely with Treasury; significant legislative reforms considered by the Council of Financial Regulators (Reserve Bank, APRA, ASIC, Treasury). - Changes to APRA‟s prudential standards and prudential practice guides can be changed at short notice by APRA without amending the enabling Act. - EC4 Findings - APRA regularly publishes details of financial strength and performance of the industry on its website and provides data used in publications such as the Financial Stability Review. - Under its prudential standards, APRA has requirements aligned with Pillar II of Basel II for public disclosure by ADIs on risk management practices and capital adequacy. - AC1 Findings - APRA uses a risk-based approach with supervisory action plans (SAP), Probability and Impact Rating System (PAIRS) and Supervisory Oversight and Response System (SOARS) to allocate resources and determine supervisory intensity. - Principle 1(2) Independence, accountability and transparency — EC1 Findings - APRA established in 1998 as an independent statutory authority, both independent from and accountable to the Australian Government. - APRA governed by a three member Executive Group appointed by the Governor-General on advice of the Treasurer; Members serve full time. - Minister may issue a written direction to APRA under section 12 of the APRA Act about policies or priorities; a direction can only be given after the Minister notifies APRA in writing and gives the Chairman an opportunity to discuss the need. To date no such direction has been issued. *Source: _cr12313 - 25. Home-host relationships* ### Section 25 of the APRA Act sets out the terms relating to the termination of ### _cr12313 - Section 25 of the APRA Act sets out the terms relating to the termination of appointment of the Members (Heads) of APRA ### Termination of appointment (Section 25) - Section 25 of the APRA Act sets out objective grounds for termination of appointment of APRA Members, e.g., bankruptcy, conflict of interest, becomes employed by a regulated company, etc. - There is no provision for public disclosure of the specific reasons for terminating the appointment of an APRA Member. - No APRA Member has ever been dismissed. - Recommendation: introduce a legal provision to require public disclosure of the specific reasons for terminating the appointment of an APRA Member. ### Governance: Risk Management and Audit Committee - Current committee membership: external chair (with casting vote), one external member, one member of APRA‟s Executive Group (one of the three Members), and one executive General Manager (one year rotation). - Recommendation: split the current combined Risk Management and Audit Committee into two separate committees: - New Risk Committee: retain current membership. - New Audit Committee: comprise external members only to avoid conflicts of interest for executives. ### Accountability and Objectives (EC2) - Purpose of APRA is set out in section 8 of the APRA Act: regulate bodies in the financial sector, develop administrative practices, and balance financial safety and efficiency, competition, contestability and competitive neutrality. - These objectives were confirmed in the Statement of Expectations 2007 issued by the Treasurer. - APRA accountability avenues: - Appearances before Parliament‟s standing committees (House of Representatives Committee on Economics, Finance and Public Administration; Senate Economics Legislative Committee as Senate Estimates) and other ad hoc committees; transcripts are publicly available and hearings are open to the public. - Financial and performance audits by the Australian National Audit Office (ANAO); ANAO reports are tabled in Parliament and publicly available. - APRA‟s Annual Report is tabled in Parliament. - Other APRA publications explain objectives, procedures and operations. ### Staff credibility and professionalism (EC3) - Assessors were very impressed by the quality and caliber of APRA staff: well-trained, experienced, professional, and committed to high standards. - Industry sources commended APRA staff for professionalism, knowledge, and receptiveness. - APRA staff are well respected within the industry and among service providers (e.g., accountancy/audit regulators and accountancy firms). ### Financing, resources and operational capacity (EC4) - APRA budget process: - Budget is proposed by APRA Members and submitted to Government for consideration and endorsement. - When agreed by Government, the budget figure forms the basis for the levy from regulated entities; thus APRA is self-funding. - APRA also receives Special Appropriations from Government for particular matters. - Examples of Special Appropriations: - 2008: Special Appropriation of $45m, payable over the following four years, to assist APRA deal with the global financial crisis. - State budget for 2012/13: APRA allocated a total of $82.4m by way of Special Appropriation, payable over a four year period. - APRA budgets (excluding Special Appropriation) in recent years: - $109m in 2008/09 - $121m in 2009/10 - $120m in 2010/11 - $120m in 2011/12 - For 2012/13, the budget fixed at $125m which includes a first tranche ($18.9m) of the Special Appropriation of $82.4m. - Constraints and oversight: - APRA‟s budget is subject to scrutiny by the Department of Finance and Deregulation. - APRA is subject to „whole of government‟ procurement and cost reduction initiatives (e.g., travel and information technology). - APRA‟s staff enterprise agreement is vetted by the Australian Public Service Commission and approved by the relevant Minister. - APRA is subject to general „efficiency dividend‟ requirements. - Assessors' view: constraints have not, to date, materially affected APRA's ability to conduct effective supervision. - Remuneration and staffing: - APRA states remuneration levels are reasonably competitive but cannot match the top end of the financial sector. - APRA can recruit high caliber specialist staff (e.g., risk management expertise) and is not constrained in what it pays individual staff within overall budgetary constraints. - APRA acknowledges difficulties in attracting and retaining staff; assessors observed some specialists are somewhat overstretched. - Staff turnover and career movement: - Volume of staff turnover in APRA‟s operational divisions was nine percent in 2011, below APRA‟s longer term average of about 14 percent and well below about 20 percent in the mid 2000‟s. - Retention remains problematic at junior levels with three to five year service. - About 90 percent of those who leave find new roles in the financial sector. - Training and IT: - APRA places heavy emphasis on training and development; expenditure places APRA in the 90th quartile of private and government organizations in Australia. - Current training priorities: developing prudential supervision skills and leadership capabilities. - APRA‟s IT infrastructure is adequate and soon to undergo significant refurbishment. - Supervisory capacity: - APRA‟s budget allows supervisors to undertake onsite review, both domestic and overseas. - Recommendation: APRA should remain mindful of the need to recruit and retain high caliber staff in numbers and expertise given increased supervisory intensity and complexity of new legislation. ### Additional criteria (AC1) - APRA Members (including the Chairman) are appointed for fixed terms of up to five years, as specified in their instrument of appointment. ### Assessment of Principle 1(2) — Independence and governance - Overall assessment: Largely Compliant. - Reason for Largely Compliant rating: issues regarding independence and absence of mandated public disclosure of specific terms relating to termination of appointment of an APRA Member (EC1). - Context: Ability of Ministers to issue directions is common to statutory authorities and considered an essential democratic check; it has never been invoked in APRA‟s case and is seen as unlikely to be invoked. - Recommendations reiterated: - Introduce legal provision to require public disclosure of specific reasons for termination of an APRA Member. - Split Risk Management and Audit Committee into separate committees and source audit committee membership externally. - Maintain attention to recruitment and retention of high caliber staff. ### Legal framework for banking supervision (Principle 1(3)) - EC1: Licensing authority - Section 9 of the Banking Act gives APRA responsibility for granting corporations the right to carry on banking business in Australia subject to conditions. - Section 9A grants APRA the right to revoke licenses for stated reasons (e.g., at the request of the holder; where continuance would not be in the best interests of depositors or contrary to the national interest). - EC2: Prudential rules and consultation - Section 11AF of the Banking Act empowers APRA to make, amend or revoke prudential standards without changing underlying legislation; prudential standards must be tabled in Parliament and may be disallowed. - Under the Legislative Instruments Act 2003, prudential standards must be tabled in each House of Parliament; a notice of motion to disallow may be given within 15 sitting days, and if passed within a further 15 sitting days the standards cease to have effect. - To date no standards have been disallowed. - APRA undertakes public consultation on changes: issues formal discussion papers and consultation packages, consults with industry and other parties, provides response papers, and publishes an annual regulatory plan detailing planned prudential policy initiatives. - EC3: Data collection powers - The Financial Sector (Collection of Data) Act 2001 provides APRA with power to collect data from ADIs and determine frequency of collection. - Section 62 of the Banking Act allows APRA to obtain information from an ADI or any member of its relevant group. - Assessment of Principle 1(3): Largely Compliant. - Comment: Placing prudential regulations before the Houses of Parliament and Ministerial direction are seen as essential democratic checks; while never invoked, they could, in extreme circumstances, prevent introduction of essential prudential standards. ### Legal powers for supervision and enforcement (Principle 1(4)) - EC1: Powers to address compliance and apply qualitative judgment - Section 11CA of the Banking Act gives APRA wide powers of direction over ADIs to ensure compliance with prudential standards or protect depositors' interests. - Part II of the Banking Act empowers APRA to intervene where an ADI is unlikely to carry on business in the interests of depositors or financial stability; powers include appointing investigators, removing boards or officers, requiring asset sales or capital raises, appointing statutory managers, and applying to the Federal Court to wind up an insolvent ADI. - Section 13(3) requires an ADI to notify APRA immediately if it is likely to become unable to meet its obligations or suspend payment. - Individual prudential standards require immediate notification to APRA of breaches or circumstances with material impact. - APRA applies qualitative judgment via PAIRS (internal risk-rating system) which drives supervisory stance. - EC2: Access to boards, management, staff, and records - APRA has legal powers to access board, senior management and records of an ADI. - Prudential Standard APS 510 – Governance requires board members and senior management to be available to meet APRA on request. - Section 62 of the Banking Act enables APRA to require an ADI to provide information, books, accounts or documents. - Section 13 of the Banking Act enables APRA to obtain information in relation to financial stability. - EC3: Remedial action and sanctions - Section 11CA enables APRA to issue directions requiring an ADI to undertake or refrain from specific actions (e.g., comply with prudential requirements, remove directors or senior managers, require audits, restrict lending, repay deposits). - Sanctions include revocation of banking license. - Assessment of Principle 1(4): Compliant. - Comment: APRA has sufficient powers to address compliance with laws and safety and soundness concerns. ### Legal protection for supervisors (Principle 1(5)) - EC1: Immunity for acts/omissions in good faith - Section 58 of the APRA Act provides APRA and its staff (including the 3 APRA Members) are not subject to liability for any act or omission in exercise of APRA‟s powers or functions unless done in bad faith. - EC2: Protection against costs of defending actions - Section 58 does not provide specific indemnification for costs of defending actions; APRA relies on the Legal Services Directions 2005 (LSD) issued by the Attorney General under section 55ZF of the Judiciary Act 1903. - Under LSD practice, expenditure to cover legal costs of an employee should normally be approved where proceedings arose out of employment and the employee acted reasonably and responsibly (i.e., no serious or willful misconduct or culpable negligence). - APRA‟s Directors‟ and Officers‟ Liability Cover policy provides cover where a director or officer is legally liable to pay for consequences of a wrongful act. - Assessment of Principle 1(5): Compliant. - Comment: While staff are protected against costs of defending actions where acting in good faith, the APRA Act does not explicitly detail costs. ### Cooperation and information sharing (Principle 1(6) — start) - EC1: Arrangements for cooperation and information sharing between domestic authorities are in place and there is evidence these work in practice. - (Further details on EC1 and related findings are present in the source beyond the provided excerpt.) *Source: IMF staff assessment text as provided in the supplied content unit.* ### Section 56 of the APRA Act enables APRA to provide confidential information to other ### _cr12313 - Section 56 of the APRA Act enables APRA to provide confidential information to other ### Information sharing framework and legal basis - Section 56 of the APRA Act enables APRA to provide confidential information to other domestic financial regulators (such as ASIC, the RBA and AUSTRAC) where such information is required to enable them to carry out their supervisory functions. - APRA has established MOUs with each of these agencies which provide a formal framework of cooperation; exchange of information is a regular feature of that cooperation. - APRA is a member of the Council of Financial Regulators (Treasury, the RBA, APRA and ASIC); the Council provides advice to the Australian Government on the adequacy of Australia‟s financial regulatory arrangements and oversees objectives and implementation of financial distress management in times of financial crisis. This function is facilitated by an MOU signed by the four Council members. - Section 56 enables APRA to share confidential information with foreign supervisors subject to the normal constraints associated with such sharing. ### Compliance with international essential criteria on cooperation (EC2–EC4) - EC2 (cooperation and information sharing arrangements with foreign supervisors) - APRA has systems of cooperation and information sharing, normally through MOUs, with foreign financial sector regulators that have supervisory responsibility for banking operations of material interest to APRA. - Notable arrangements: New Zealand and the UK, where the bulk of Australian banks‟ overseas operations are based. - A Trans-Tasman Council of Banking Supervision exists for New Zealand to facilitate coordinated supervision where almost all banking services in New Zealand are provided by Australian banks. - Where relevant, APRA takes part in supervisory colleges and is the home supervisor for the two Australian banks with material overseas operations. - EC3 (safeguards on use and confidentiality of exchanged information) - The supervisory may provide confidential information to another domestic or foreign financial sector supervisor only where reasonable steps indicate the receiving party will use it only for supervisory purposes and will treat it as confidential. - Under Section 56, APRA may provide confidential information where it is satisfied the information will be used for supervisory purposes and that recipients are subject to the same confidential constraints as APRA. Section 56 also subjects confidential information received by APRA to confidential constraints. - EC4 (ability to deny demands for confidential information) - APRA may only disclose information for stated reasons (e.g., exchange with a fellow regulator for supervisory purposes). - Section 56 provides that APRA is exempt from being required to disclose confidential information under the Freedom of Information Act, 1982. APRA expects that Government review of that Act will not adversely impact its ability to restrict disclosure. ### Assessment of Principle 1(6) - Assessment: Compliant - Comment: The 2006 BCP recommendation to remove legal obstacles to exchange of information between APRA and AUSTRAC was achieved with the passing of the Anti-Money Laundering and Counter Terrorism Financing Act 2006. ### Permissible activities and use of the term “bank” (Principle 2) - EC1 (definition and control of term “bank”) - The term “bank” is not defined in legislation. Use of the word “bank” in relation to financial business is restricted and requires APRA approval. - APRA will only grant approval to an ADI to describe itself as a bank where it holds at least $50m in Tier 1 Capital. - “Banking business” is defined in Section 5 of the Banking Act 1959; any company wishing to carry out “banking business” must be authorized by APRA (Section 9 of the Banking Act 1959). „Banking business‟ includes „both taking money on deposit (otherwise than as part-payment for identified goods or services) and making advances of money‟ and other prescribed activities. - The Banking Act defines „authorized deposit-taking institution‟ (ADI) as a body corporate granted authority to conduct banking business in Australia; ADIs include banks, credit unions and building societies. All ADIs are subject to equivalent supervision. - EC2 (permissible activities defined) - Only ADIs authorized by APRA can carry on banking business in Australia; APRA may impose conditions on an ADI‟s authority. - Authorization requires a written undertaking to „consult APRA and be guided by it on prudential matters, including in respect of new business initiatives‟. - ADIs must prenotify APRA and ensure APRA is satisfied that the institution can manage changes or new business activities that may materially alter the group‟s overall risk profile (paragraph 8(c) of Prudential Standard APS 222 Associations with Related Entities). - EC3 (restriction on use of “bank” and related expressions) - Section 66 of the Banking Act restricts use of restricted words or expressions in relation to financial business, including „bank‟, „banker‟ and „banking‟. Section 66A restricts „authorized deposit-taking institution‟ and „ADI‟. - Exemptions and permitted uses: - ADIs that are banks may use „bank‟, „banker‟ and „banking‟ on an unrestricted basis. - APRA applies a „substance test‟ for ADIs wishing to be termed a bank in Australia: minimum Tier 1 capital of $50 million. This test applies equally to foreign bank subsidiaries, potential Australian-owned entrants and existing credit unions or building societies wishing to convert to a bank. - A foreign corporation authorized as a bank in its home country may use „bank‟ terms in relation to raising funds in the Australian wholesale capital market through issuing securities, subject to conditions: - the securities must be offered and/or traded in parcels of not less than $500,000; and - the securities and related information memorandum must clearly state that the issuer is not authorized as a bank under the Banking Act. - Credit unions and building societies have class approval to use the expression „banking‟ (not “bank”) provided it is not misleading or deceptive. - APRA guidelines, „Implementation of Section 66 of the Banking Act 1959‟, detail APRA‟s approach to authorizing restricted expressions. - Changes since 2006: In 2010 the Government released the „Competitive and Sustainable Banking System‟ package; APRA reviewed guidelines and revoked an existing consent for non-regulated financial businesses in the short-term money market to describe themselves as „merchant banks‟. - EC4 (reservation of deposit-taking) - Not all deposit-taking institutions in Australia are licensed and supervised as banks; section 11 of the Banking Act permits exemptions. - Exempted entities are not subject to prudential supervision as ADIs. - A Government-owned insurance and banking organization operates in the Northern Territory not supervised by APRA but monitored by the Northern Territory Treasury; deposits are government-guaranteed. - Section 11 exemptions are generally by class order; two exemptions currently in force: - a) Registered entities (Registered Financial Corporations “RFCs”) - RFCs (defined by the Financial Sector Collection of Data Act 2001 (FSCODA)) must hold an Australian Financial Services (AFS) license under the Corporations Act and are subject to ASIC regulation; RFCs have some aggregate and non-prudential reporting requirements to APRA in APRA‟s capacity as Government data agency. - The Banking Exemption Order 96 permits exempted entities to engage in activities that would otherwise constitute banking business where the entity takes money on deposit by issuing or selling securities (Part 6D.2 of the Corporations Act 2001), issuing or selling a financial product (Part 7.9 of the Corporations Act), or otherwise, contingent on a prudential supervision warning: - i. the registered entity is not authorized under the Banking Act and is not supervised by APRA; and - ii. the investment will not be covered by the depositor protection provisions in section 13A of the Banking Act. - RFCs are not obliged to issue the prudential supervision warning to professional investors. - RFC activity represents a relatively small part of the Australian financial sector. Total funds taken by RFCs is estimated to be approximately AUD53 billion, and in many cases is provided by the parent entity, but less than a tenth of the funding is retail. - Some RFCs may be permitted to use the term “bank” if they meet the foreign-authorized-bank conditions set out in EC3. - New RFCs can be established; requirements are imposed by ASIC rather than APRA. - b) Religious charitable development funds - Case-by-case permission has been granted to raise funds from the public to make loans furthering the fund‟s objectives. Post-2006 tightened requirements include: - i. the fund must be formed for religious and charitable purposes, and operate on a not-for-profit basis; - ii. the fund must not offer EFTPOS or ATM facilities; - iii. the fund must prominently disclose that: (a) the fund is not prudentially supervised by APRA; (b) contributions to the Fund are not entitled to depositor protection; and (c) the Fund is designed for investors who wish to promote the charitable purposes of the Fund. ASIC monitors such disclosures and marketing. - Check books and ATM cards can be issued by such funds. - The size of the religious charitable development funds is approximately AUD4.3 billion. - The current section 11 exemption for religious charitable development funds is expressed to expire on 27 June 2013. APRA and the Government are undertaking a comprehensive review of the exemption and will consult widely. - Changes since 2006: - The Government introduced an easy-to-recognize seal that ADIs may elect to use in respect of protected accounts covered by the Financial Claim Scheme (FCS); use is voluntary and the full rules have not yet been finalized. - EC5 (public list of licensed banks) - APRA publishes and maintains a list of ADIs on its website. The register of ADIs uses the following categorization: - Australian-owned banks; - foreign subsidiary banks; - branches of foreign banks; - building societies; - credit unions; and - other ADIs. - APRA also maintains a list of authorized non-operating holding companies. ### Assessment of Principle 2 - Assessment: Largely Compliant - Comments: - Non-authorized and non-supervised deposit taking institutions operate in Australia using section 11 exemptions; these institutions are few and their activities are predominantly de minimis, though a major global institution has until recently benefitted from this exemption. - The voluntary FCS seal may help distinguish protected accounts but is not mandatory; APRA cannot make it mandatory. - APRA‟s legal powers are limited with respect to section 11 exemptions; monitoring of exempted institutions for misleading behavior and marketing is carried out by ASIC rather than APRA. - Recommendation: It is strongly recommended that the conditions for exemption from section 11 of the Banking Act for RFCs be reconsidered; suggest limiting section 11 exemptions to institutions reliant wholly on wholesale funding to reduce APRA‟s reputational risk. ### Licensing authority and criteria (Principle 3) - EC1 - APRA is both the licensing authority and the supervisor of banks in Australia. - EC2 - APRA is empowered under Section 9 of the Banking Act 1959 to grant or reject applications for an „authority to carry on banking business‟. APRA determines criteria and information requirements and publishes these in the ADI Authorisation Guidelines on APRA‟s website. - EC3 - Criteria for assessing applicants are derived from and consistent with APRA‟s ongoing supervision requirements set out in the prudential standards: strategic and financial viability, effective risk management framework, legislative obligations and prudential requirements at licensing and ongoing basis. - EC4 - APRA has the power to grant or reject applications for a bank authorization. *Source: _cr12313 - Section 56 of the APRA Act enables APRA to provide confidential information to other* ### Section 9 of the Banking Act, which states that “APRA may, by legislative instrument, ### _cr12313 - Section 9 of the Banking Act, which states that “APRA may, by legislative instrument, ### Section 9 authority and APRA practice - Section 9 of the Banking Act states that “APRA may, by legislative instrument, set criteria for the granting of an authority to carry on banking business in Australia.” - APRA has not chosen to make such a legislative instrument. - APRA does not approve an authorization until its information needs have been fully satisfied. - In the context of granting authority under section 9, APRA may take into account the suitability of the owners. ### Review and reconsideration procedures (Banking Act Part VI) - The Banking Act (Part VI) contains provisions for reconsideration and review if APRA refuses a licence application or imposes conditions or restrictions on the authorisation. - The Banking Act sets out the procedures and timelines for review and reconsideration. - The reasons for a decision are always given in any review. - Where a person affected by the reviewable decision is still dissatisfied with the decision after an internal review by APRA, the applicant can then make an application to the Administrative Appeals Tribunal for a review of that decision. ### Interaction with the Financial Sector (Shareholdings) Act 1998 (FSSA) - In the context of the FSSA, one of the matters that APRA may take into account in determining whether to grant authority under section 9 of the Banking Act to carry on banking business is the suitability of the owners. - An FSSA application is ordinarily submitted at the same time as an application for a Section 9 authorisation. - This simultaneity is because the section 9 authorisation means that the entity immediately meets the definition of "financial sector company" in section 4 of the FSSA. *Source: _cr12313 - Section 9 of the Banking Act (excerpt).* ### section 14 FSSA) an unacceptable shareholding would exist in relation to any ### _cr12313 - section 14 FSSA) an unacceptable shareholding would exist in relation to any ### Financial Sector (Shareholdings) Act 1998 (FSSA) — shareholding limits and interaction with APRA - Ownership in locally incorporated banks is governed by the Financial Sector (Shareholdings) Act 1998 (FSSA), which limits shareholdings of an individual shareholder, or group of associated shareholders, in a bank to 15 percent of the bank‟s voting shares. - Any shareholding over 15 percent is subject to FSSA requirements and is permitted only if not contrary to the national interest; depending on the acquisition either the Treasurer or APRA (within delegations provided by the Treasurer) may approve shareholdings in excess of 15 percent. - Under the current threshold of delegation the Treasurer has delegated approval authority to APRA in respect of ADIs with assets less than AUD 1 billion. - For cases falling below the threshold of delegation there is no provision in the FSSA for the Treasurer to overrule APRA‟s decision. - The Treasurer will seek APRA's opinion on suitability of shareholders; Treasury guidelines state "APRA is consulted on all FSSA applications before any recommendations are put to the Minister as prudential issues are a primary consideration in any FSSA decision". - A decision by the Treasurer under the FSSA is subject to judicial review, including the Administrative Decisions (Judicial Review) Act 1977 (ADJR Act); failing to take a relevant consideration into account can be an 'improper exercise of power' under the ADJR Act. - APRA does not have a legal prudential veto under the FSSA, but Banking Act 1959 provisions provide legal grounds for APRA to withhold ADI authorization if the overall application is deficient. ### Licensing and authorization (EC5–EC13): assessment scope and standards - EC5: Licensing authority determines proposed legal, managerial, operational and ownership structures will not hinder effective supervision on solo and consolidated basis. - APRA assesses legal, managerial, operational and ownership structures in detail during licensing, including reporting lines within wider groups. - APRA may require a holding company of a conglomerate group be authorized as a non-operating holding company (NOHC). - EC6: Identification and suitability of major shareholders and sources of initial capital. - APRA requires applicants to identify substantial shareholders (direct and ultimate), shareholdings, sources of initial capital and potential future capital requirements; expectations set out in ADI Guidelines (not legally binding). - Applicants must demonstrate substantial shareholders are well-established, financially sound, long-term committed, and able to contribute additional capital if required. - EC7: Minimum initial capital. - ADI Authorisation Guidelines specify proposed new banks must have at least $50 million in Tier 1 capital unless a branch of a foreign bank. - Australian branches of foreign banks are not required to have capital in Australia but foreign parent must meet comparable home regulator requirements. - APRA can specify a higher minimum capital amount via conditions on a banking authority or by specifying an individual prudential capital ratio (PCR) under APS 110. - An institution may be authorized as an ADI without designation as a bank and thus not subject to the $50 million Tier 1 threshold; no minimum threshold stated for such an institution though APS 110 minimum capital adequacy applies. - EC8: Fit and proper assessment of directors and senior management. - Applicants must satisfy APRA that directors and senior managers are fit and proper per Prudential Standard APS 520 Fit and Proper (to be superseded by CPS 520 from end of June 2012 with consistent key requirements). - APS 520 requires a Fit and Proper Policy, pre-appointment assessment and annual re-assessment, and submission of information to APRA. - Criteria include: competence, character, diligence, honesty, integrity and judgment; whether disqualified by APRA; material conflict of interest. - APRA may direct removal of an officer judged not fit and proper and may undertake independent checks though not routinely. - EC9: Governance, risk management, internal controls, outsourcing oversight, and operational structure. - APRA reviews three-year business plan, governance framework, risk management, information/accounting systems, internal and external audit, and outsourcing proposals; assessment based on proportionality to nature, scale and complexity. - Applicants must demonstrate compliance with prudential standards on credit, market, operational and liquidity risk; provide financial projections and key ratios; show information systems can produce statutory and prudential information from commencement. - Business continuity (APS 232) and outsourcing (APS 231) requirements apply; APS 510 and APS 310 set internal/external audit expectations, including external auditor reporting to APRA. - EC10: Financial projections and principal shareholder financial strength. - Applicants submit detailed balance sheet, cash flow, earnings projections and key financial/prudential ratios for three-year business plan; APRA expects sensitivity analysis and may require stressed estimates. - Substantial shareholders must demonstrate long-term commitment and capacity to provide additional capital. - EC11: Foreign banks — home supervisor no objection and consolidated supervision. - APRA requires foreign bank applicants to have consent from home supervisor; home supervisor must supervise on a consolidated basis in accordance with Basel Concordat and be prepared to cooperate with APRA. - EC12: Revocation of license for false information. - APRA can revoke authorization immediately if bank provided false or misleading information in connection with application (Section 9A(2)(aa) Banking Act). APRA may bypass usual procedures if delay would be contrary to national interest or depositors' interests (9A(4)). - EC13: Board collective knowledge and skills. - APRA assesses that Board and senior management collectively have the skills needed and each director can effectively contribute; APS 510 requirements enforced. ### Findings, supervisory practice, and recommendations related to authorization - APRA has a clearly established authorization process guided by ADI Authorisation Guidelines; applicants pay a fee of AUD 62,000. - APRA adopts an iterative dialogue with applicants and has full powers to reject inadequate applications; not obliged to grant authority within prescribed timeframes. - Concern: APRA indicated independent checks on directors and senior management may not occur as a matter of course — assessors recommend APRA adopt systematic, complete independent checks at authorization. - Assessment of Principle 3: Largely Compliant. ### Transfer of significant ownership and change of control (Principle 4) - EC1: Definitions of “significant” ownership and “control.” - Australian legislation does not define numeric thresholds for significance beyond FSSA 15 percent limit; FSSA defines control broadly including trusts, agreements, arrangements and practices. - A person‟s stake is aggregated voting power of person and associates; associates defined broadly (clause 4 of Schedule 1). - Treasurer can declare a person to have "practical control" even if stake ≤ 15 percent (section 23) requiring relinquishment (section 24). - EC2: Requirements for approval/notification of ownership changes. - Prior approval required under FSSA to acquire > 15 percent stake or increase beyond existing approval; acquiring without approval is an offence under section 11 and Treasurer can seek remedial court action including divestment (section 12). - Treasurer delegated to APRA for banks with assets less than $1,000 million; Treasurer will seek APRA advice for entities > $1,000 million. - FSSA applies to domestic and non-domestic stakeholders; foreign acquisitions may also require approval under Foreign Acquisitions and Takeovers Act 1975 with FIRB advice. - Competition issues assessed under section 50 of the Competition and Consumer Act 2010 (ACCC involvement). - EC3: Supervisor power to reject changes in significant ownership. - FSSA restrictions apply equally to new banks and existing banks; APRA has delegated authority below the one billion dollar asset threshold; above that threshold determination rests with the Treasurer. - Where APRA has delegation, it assesses significant new shareholders of existing institutions on same basis as initial shareholders. - Treasurer or APRA (delegate) may revoke or vary existing approvals if national interest or contravention exists. - APRA lacks direct legal power to reject proposed change of control for entities above the one billion dollar asset threshold, but has remedial legal powers including seeking compulsory transfer under FSBTGR Act or revoking bank license; may take control or appoint statutory manager under Banking Act sections 13AA(1)(b)(iii) and (iv) and 13(2) if ADI cannot carry on banking consistent with depositors' interests or stability of financial system. - EC4: Supervisor obtains names and holdings of significant shareholders. - APRA does not routinely collect names/holdings of significant shareholders; can request full owner details under section 62 of the Banking Act if doubts arise. - Public disclosure rules (Corporations Act 2001 section 671B) require substantial holding notices for listed companies (substantial holding defined as five percent or more). - ASIC can issue disclosure notices for ownership interests in certain companies. - EC5: Supervisor can address unauthorized changes of control. - Treasurer may apply to Federal Court for remedial orders including divestment for unacceptable shareholding (>15 percent without approval); APRA has delegation and may initiate proceedings under section 12 without needing Treasurer's involvement (Treasurer informed). - ASIC has divestiture powers under Corporations Act; Federal Court can order divestiture if merger breaches section 50 of Competition and Consumer Act. - AC1 (additional): Notification by banks of material adverse information about major shareholders. - No specific statutory requirement for banks to notify APRA when becoming aware of material information about a major shareholder's suitability. - APRA expects timely notification from boards/management; supervisory practice and close contact largely ensures APRA is alerted, though formal requirement absent. - Assessment of Principle 4: Materially Non Compliant. - Key concerns: restriction on APRA's legal power to veto change of control for entities above $1,000 million asset threshold; absence of routine requirement for ADIs to provide regular notifications of major shareholders and ultimate beneficial owners. - Recommendations from assessors: - Grant APRA a clear and binding right of veto on prudential grounds concerning change of control of ADIs irrespective of entity scale. - Introduce at minimum an annual requirement for ADIs to report identities of beneficial owners and major shareholders (some jurisdictions use a 5 percent reporting threshold). - Require ADIs to notify APRA as soon as they become aware of any material adverse development concerning suitability of a major shareholder. ### Major acquisitions and investments (Principle 5) - EC1: Clear definitions of acquisitions/investments requiring prior approval. - APS 222--Associations with Related Entities sets requirements for prior notification/consultation and APRA consent. - APS 222 requires banks to consult APRA before: - establishing or acquiring a subsidiary (other than a special purpose financing vehicle) (paragraph 35(a)); - acquiring an interest of more than 20 percent in another entity (paragraph 35(b)); - taking up an interest from work-out of a problem exposure where thresholds exceeded (paragraph 35(c)). - Banks must obtain APRA's prior consent to establishment or acquisition of a regulated presence domestically or overseas (paragraph 8(d)). - ADIs must report equity investments not subject to prior consultation within three months (paragraph 37). - Exposures to related entities must comply with thresholds by reference to capital base (paragraph 32); prior approval required if exposures exceed prescribed limits. - EC2: Criteria to judge proposals. - APS 222 paragraph 4 lists factors APRA will consider (financial strength, nature of group business, quality of management and risk systems, interdependence, regulation quality, ratings, badging/product distribution, other case-by-case factors). - APRA internal guidelines add factors: strategic rationale, funding and impact on capital/profitability, due diligence quality, integration capacity, group structure, risk management and reporting, trading/funding/risk appetite, hedging policy, home supervisor position. - APRA expects early informal consultation and may require further documentation and meetings; internal consultation with risk/legal specialists may be required. - EC3: Prohibition where exposures hinder supervision or in secrecy jurisdictions. - APRA will not consent to acquisitions where bank cannot comply with reporting or prudential requirements (e.g., secrecy laws of foreign jurisdiction). - APRA has power under section 11CA of the Banking Act to direct a bank or NOHC not to proceed or to divest interests where appropriate (contravention of conditions, Banking Act, or materially impaired financial condition). - EC4: Assessment of financial and organizational resources for acquisition. - APRA assesses due diligence quality, size/nature/strategic intent, capital adequacy after acquisition, funding/liquidity, impact on risk management and governance, and capability to satisfy reporting needs. - APRA reviews documents: due diligence reports, capital management plans (typically three years), revised organizational structures, business plans, policy frameworks, project management plans, revised funding plans, and financial control plans for prudential reporting. - EC5: Cases where post-acquisition notification suffices. - APS 222 sets a low threshold: any proposal with potential to materially alter group risk profile requires prior notification; post-event notification acceptable only where: - acquisition/investment does not materially alter group risk profile; - did not involve establishing/acquiring subsidiary (other than SPV); - did not involve regulated business (banking/insurance); - did not represent ownership stake of 20 percent or greater. - Paragraph 37 requires written notification of equity investments within three months if prior consultation not required. - EC6: Supervisor awareness and mitigation of non-banking activity risks. - APS 222 explicitly addresses contagion risk and empowers APRA to request group information, require additional internal controls, reporting mechanisms, and higher prudential capital ratios. - APRA routinely monitors exposures to related entities and can require capital, limits or other measures to mitigate contagion. - Assessment of Principle 5: Compliant. ### Capital adequacy (Principle 6) - EC1: Legal/regulatory requirement to calculate and maintain minimum capital adequacy; definition of capital components. - Capital adequacy requirements set out in APS 110 and APS 111. - APS 110 requires banks to maintain adequate capital on standalone and consolidated basis; prudential capital ratio (PCR) at least eight percent (total capital) with four percent Tier 1 at all times; APRA expects banks to hold a buffer above PCR. - APRA may increase PCR and at least half of any higher ratio must be Tier 1 unless APRA states otherwise; APRA may increase PCR at standalone and consolidated levels. - APS 111 defines characteristics for Tier 1 and Tier 2 capital; does not recognize Tier 3; capital base is sum of Tier 1 and Tier 2 net of specified deductions and amortization subject to limits. - EC2: Consistency with applicable Basel requirements for internationally active banks. - APRA‟s capital definitions, calculations and ratios accord with applicable Basel minimums; APRA has adopted more conservative stance in some areas (deductions from Tier 1, non-recognition of Tier 3). - At time of assessment (2012) Basel 2.5 rules in effect; draft Basel 3 prudential standards issued March 2012; APRA intends to be an “early adopter” of Basel 3. - As of December 2011, aggregate Tier 1 capital ratio for locally-incorporated banks was 10.3 percent of risk-weighted assets (up from 7.4 percent in 2007); total capital ratio was 11.8 percent. - EC3: Power to impose specific capital charge/limits on exposures. - APRA has broad powers under Banking Act 1959 (section 11AF) and prudential standards to set/adjust capital requirements or impose limits; examples include APS 116, APS 117, APS 120, APS 220, APS 221, and APS 222 provisions for higher capital or multipliers. - EC4: Capital ratio reflects bank risk profile, including on- and off-balance sheet risks. - APRA sets PCRs for individual banks reflecting risk profile; PCRs set at solo and consolidated levels; APRA reviews PCR at least annually. - Total risk-weighted assets include on- and off-balance sheet assets (APS 110, Attachment D, paragraph 6). - EC5: Jurisdictional conditions may justify higher capital standards than Basel minima. - APRA uses power to set PCRs higher than Basel minima and has exercised it; all banks operate above minimum Basel requirements. - EC6: Authority to act if bank falls below minimum capital ratio. - Breach of PCR is breach of minimum capital ratio; APRA can issue directions under section 11CA; failure to comply is a criminal offence; other powers include imposing conditions, issuing directions, taking control or appointing an administrator. - APRA would intensify supervision and require a remediation plan if PCR declines toward Basel minimum. - EC7: Use of internal models subject to rigorous approval and ongoing standards. - Banks may use internal models subject to APRA approval per APS 113, APS 115, APS 117, APS 116 (updated for Basel 2.5); APRA conducts onsite reviews. - APRA requires full modeling approach if IRB approach sought and discourages approval solely for capital savings. - APRA may vary or revoke approvals or impose conditions and has precedent for revocation/variation and multiplier increases. - Assessment of Principle 6: Compliant. *Source: IMF assessment text provided in content unit _cr12313 - section 14 FSSA) an unacceptable shareholding would exist in relation to any* ### 2009. Discussion with firms confirmed close scrutiny and conservatism paid by APRA ### _cr12313 - 2009. Discussion with firms confirmed close scrutiny and conservatism paid by APRA ### Capital framework and additional criteria (AC1–AC5) - AC1: APRA does not draw any distinction between internationally active and internationally non-active banks in relation to the application of capital standards: all banks must comply with the same prudential standards, which are consistent with, and in places more conservative than, applicable Basel requirements. - AC2: APRA applies the same prudential standards to non-internationally active banks and their holding companies as to internationally active banks. - AC3: APRA requires banks to adopt a forward-looking approach to capital management: - APS 110 outlines capital management requirements. - Paragraph 6(b) of APS 110 requires banks to have a capital management plan consistent with the bank‟s overall business plan on an ongoing basis. - The ICAAP is an integral component of APS 110; it must document strategies for maintaining appropriate capital resources and the means for sourcing additional capital. - A bank‟s ICAAP is one input into APRA‟s process of setting a PCR for each bank, allowing APRA to set capital requirements in anticipation of possible events or changes in business plans or market conditions. - During 2008 and 2009 APRA sought to give more feedback to firms on stress, scenario testing. Currently there is an overall review of the ICAAP processes. - AC4: APS 110 requires banks to maintain adequate capital on both an individual and group basis (paragraph 6) and, for conglomerate groups, requires the Board to establish group capital adequacy policies and a group capital management plan (paragraph 9). APS 110 also requires the Board to consider the ability to extract capital from group members when needed. - AC5: APRA has and exercises its power to set Tier 1 and total capital ratios (namely PCRs) for individual banks or banking groups above the minimum levels established by the Basel Committee. ### Assessment under Principle 6 (Capital adequacy) - Assessment: Compliant - Comments: - APRA has long adopted a conservative approach to the definition of capital and is maintaining this stance through the transition to the Basel 3 framework. - Because the APRA definition of capital is conservative relative to the applicable Basel standard, capital ratios in Australia are lower than they would be if calculated in other jurisdictions. - APRA has compared calculations based on its methodology and some European methodologies; some banks publish ratios under more than one standard to illustrate differences. - A more comprehensive disclosure regime would help the financial community make valid comparisons between Australian capital strength and other jurisdictions. ### Risk management process — Principle 7 (EC1–EC10) - Assessment: Largely Compliant - High-level findings: - APRA‟s prudential standards set detailed risk management requirements; APS 310, APS 222 and APS 510 are central standards referenced. - APRA assesses banks‟ risk profile and risk management through PAIRS (Inherent Risk and Management and Controls) feeding into SOARS and SAPs. - APRA plans to harmonise ADI risk management requirements into an overarching risk management standard. - EC1 (comprehensive risk management policies and processes): - APS 310 and other prudential standards require Board and management to ensure systems to limit risks to prudent levels. - Onsite reviews assess management practices and expect “demonstrated applications”; APRA can issue detailed recommendations and require remedial action, including timetables. - EC2 (board-approved risk strategies and limits): - APS 310 requires an annual attestation by the Board and CEO that they have identified key risks and established systems to monitor and manage them. - APRA has requested banks to develop risk appetite statements (RAS); thematic offsite review of RAS occurred during 2010/11. - APS 510 requires a board committee to provide an objective non-executive review of risk management (paragraph 55). - EC3 (documentation, review, communication, exceptions): - APS 310 requires risk management descriptions to be reviewed at least annually (paragraph 23) and banks to inform APRA of material changes (paragraph 24). - APRA assesses MIS, policy exception handling, and accessibility of policies to staff; APRA may appoint auditors for special purpose engagements under APS 310. - EC4 (senior management and board understanding of risk and capital linkage): - APRA frequently meets senior management and Boards; the Chairman meets major bank Boards annually. - Supervisory review considers Board role in RMSD approval, risk appetite expression, and alignment of RMSD to strategic plans. - APS 510 requires the Board Audit Committee to review effectiveness of financial reporting and risk management (paragraph 55). - APRA observed variation in industry practice but noted evolution toward better board oversight and integrated risk thinking. - EC5 (ICAAP and capital adequacy assessment): - APS 110 requires all banks to have an ICAAP; ICAAP minimums include systems to identify/measure/monitor/manage risks continuously and a capital management plan. - ICAAPs must be subject to effective and comprehensive review, proportionate to bank size and complexity. - APRA reviews ICAAPs annually; a proportionate approach means economic capital models are not obligatory. - Supervisors noted some ICAAPs were not sufficiently well developed; APRA uses PAIRS to independently assess appropriate capital-risk relationships. - EC6 (model validation and testing): - Banks using advanced methodologies for regulatory capital require APRA approval. - APS 113, 115, 116 and 117 require accredited banks to have independent, robust, documented validation of internal models, including periodic re-validation and independent review. - APRA undertakes targeted onsite reviews of internal models and modifications require APRA prior approval. - Discussion with firms indicated models teams, while skilled, appeared to be stretched in their resources. - EC7 (management information systems): - APRA assesses MIS quality and timeliness through supervisory programs; in some areas (e.g., liquidity risk) APRA regularly receives MIS reporting. - APRA employs IT risk specialists for MIS assessments and integrates IT operational risk reviews with Board reporting assessments. - ICAAP reporting on capital adequacy is routinely included in committee and Board reporting; annual CEO declaration (endorsed by Board) attests to systems to monitor and manage risks (APS 310, paragraph 26). - EC8 (new products and major initiatives): - Boards must consider inherent risks of new activities/products and whether risk management processes require change (examples: para 52 of APS 220; para 24 of APS 117). - APS 222 requires Board approval of material changes to group risk management policies. - APRA expects robust product approval processes and consultation where significant risks arise. - EC9 (risk control/independence and reporting lines): - Prudential standards and internal supervisory guidance support three lines of defence structures. - APRA assesses status, resources, skills, independence and reporting lines of risk functions and reviews role statements, KPIs and remuneration incentives. - EC10 (standards on key risks): - APRA has detailed prudential standards covering credit risk, large exposures, associations with related entities (with limitations noted in CP11), liquidity risk, IRRBB, operational risks, governance and fit and proper requirements. ### Additional criteria under Principle 7 (AC1–AC3) — specific points - AC1: APRA requires larger and more complex banks to have dedicated risk units; APS 310 requires internal audit to cover compliance with prudential standards and APRA reviews internal audit plans and meets internal auditors offsite and onsite. - AC2: APRA requires rigorous, forward-looking stress testing: - Stress testing requirements for market and liquidity risks in APS 116 and APS 210 have been in place since September 2000. - Credit risk stress testing requirements (APS 112 & APS 113) were formalized in January 2008. - APRA required advanced banks to self-assess against the Basel Committee paper Principles for sound stress testing practices and supervision (May 2009). - APRA has developed a proof-of-concept stress testing tool using prudential returns and judgment-based risk estimates and plans to expand this capacity. - AC3: APRA expects reputational and strategic risks to be captured in ICAAP; strategic risk is a component of PAIRS assessment; APS 222 requires systems to manage contagion risk. ### Credit risk — Principle 8 (EC1–EC4 and AC1–AC3) - Assessment: Compliant - EC1 (Board approval and oversight of credit risk strategy): - APS 220 requires Board and management responsibility for an effective credit risk management system appropriate to the bank‟s risk appetite. - APS 220 requires Board approval/oversight for credit exposure reporting criteria (paragraph 18), credit-risk grading (paragraph 21), timely recognition of impaired facilities (paragraphs 22 and 28), collateral valuation basis (paragraph 32), and provisioning/GRCL assessments (paragraph 37). - APRA conducts onsite prudential reviews with Credit Risk specialists and reviews board minutes, policies, and risk appetite statements. - EC2 (controlled credit risk environment and processes): - APS 220 requires documented policies covering estimation of inherent credit risk, monitoring, identification of impaired facilities, collateral recognition and valuation, write-down/write-off, validation of credit assessment and provisioning, adequacy of provisions and reserves, and data for credit exposure assessment. - Internal supervisory guidance addresses credit culture, risk appetite, methodologies, delegation authorities and detailed policy content (examples listed in guidance). - Onsite credit reviews include loan file reviews; APRA issues requirements and recommendations and provides a structured reporting approach; external auditor industry-wide reviews have been used for targeted topics (collateral management, foreclosure management, housing loan approval standards). - APRA raises industry issues and seeks views on matters including Responsible Lending provisions under the National Consumer Credit Protection Act 2009 and other listed topics. - Compliance with prudential standards is subject to annual limited assurance by appointed auditors under APS 310. - EC3 (arm’s length credit decisions and conflicts of interest): - APRA expects procedures to prevent conflicts of interest; internal guidance and APG510 remind firms of Corporations Act provisions. - Onsite reviews target exposures susceptible to conflicts (e.g., related entities); accreditation for advanced methodologies addressed operational integrity and governance. - APS 510 and APS 520 support sound risk governance and segregation of duties is periodically assessed. - EC4 (supervisor access to credit and investment portfolio information and staff): - Banking Act 1959 grants APRA power to require information; in practice APRA has full access to portfolio information and relevant staff and meets lending officers during onsite reviews. - AC1 (credit decision thresholds): - APRA ensures, via onsite reviews and board minutes, that credits above certain size, risk or capital thresholds are reviewed/approved at senior levels; for advanced banks riskier exposures should be subject to higher scrutiny and senior decision-makers. - AC2 (counterparty credit risk): - Prudential standards require policies/processes to address counterparty exposures from treasury and derivatives; APRA uses credit and market risk specialists in onsite reviews; methodologies, mitigation and CCR stress testing frameworks are assessed. - AC3 (monitoring total indebtedness): - APS 220 paragraph 34 specifies that reliance on collateral must not substitute for assessment of the borrower‟s ability to meet obligations; banks must consider total indebtedness and require independent verification of borrower information; responsible lending obligations reinforce verification. ### Problem assets, provisions and reserves — Principle 9 (EC1–EC2) - EC1 (policies and periodic review for problem assets): - APS 220 and associated guidance (Impaired Facility Definitions, Impairment, Provisioning and the General Reserve for Credit Losses, Prescribed Provisioning, Credit Risk Grading Systems) require timely recognition and ongoing scrutiny of impaired exposures. - Impaired exposures include facilities where there is doubt over timely collection of full contractual cash flows (paragraph 23 of APS 220); impairment recognized when estimated cash flows fall short (paragraph 24). - APS 220 requirements include timely recognition (paragraph 28), reliable estimates of future cash flows (paragraph 30), use of bank‟s own methodologies for impairment and provisions (paragraph 43), group facility impairment considerations (paragraph 11 of AGN 220.1), restructured facility identification and monitoring (paragraph 28 of AGN 220.1), validation of credit risk models for provisioning (paragraph 31 of AGN 220.2), and criteria for individual vs portfolio provisioning (paragraph 37 of AGN 220.2). - EC2 (supervisor confirmation of adequacy of classification and provisioning): - APRA regularly reviews credit risk grading, impairment and provisioning policies via onsite reviews and undertook targeted reviews in 2009 of provisioning policies in response to market conditions. - Provisioning levels and classification movements are reported quarterly to APRA (ARF 220.0 Impaired Facilities and ARF ...). *Source: _cr12313 - 2009. Discussion with firms confirmed close scrutiny and conservatism paid by APRA* ### 220.5 Movements in Provisions for Impairment). Data are subject to external audit ### 220.5 Movements in Provisions for Impairment ### Supervisory reporting, audit and review processes - APS 310 (Audit and Related Matters) requires appointed auditors to inform APRA promptly where they form the view that there is a material misstatement of provisions and impaired assets. - Supervisors review banks' portfolios and credit quality using automatically generated quarterly reports indicating key financial ratios and trends; peer group analysis may prompt targeted onsite reviews with credit risk specialists. - Following identification of misreporting, APRA has provided industry-wide feedback (for example, the letter to the ADI industry of 18 May 2007) to clarify reporting requirements on impaired assets and provisions. ### EC3 — inclusion of off-balance sheet exposures in classification and provisioning - The definition of impaired assets under APS 220 includes off-balance sheet exposures. - Inclusion of off-balance sheet items and reporting of provisions for such exposures are detailed in AGN 220.1 (paragraphs 12–15). - Instructions to ARF 220.0 use APS 220's definition for regular reporting but give specific measurement instructions for off-balance sheet credit exposures (see paragraphs 1–3 under "scope"). ### EC4 — adequacy of provisioning and write-off policies and processes - APS 220 (paragraph 36) requires a bank to report specific provisions and GRCL that, together, are adequate at all times to absorb credit losses given the facts and circumstances applicable at the time; losses include incurred, incurred-but-not-yet-reported, and estimated future credit losses. - APRA requires provisions and reserves to cover inherent credit risk over the life of individual facilities; this typically results in a higher level of losses than under the "incurred loss" approach of IFRS. - AGN 220.2 (Paragraph 31) sets out elements that provisioning/reserving policies must cover; APRA expects provisions to reflect realistic repayment and recovery expectations but acknowledges the high degree of professional judgment involved. - APS 220 (Paragraph 7) requires documented credit policies addressing write-down or write-off; write-offs are reported quarterly in ARF 220.5. - System-generated reports include bad debts written off and bad debts recovered, and supervisors compare bad debt experience relative to peers and credit cycle perceptions. - In February 2008 APRA wrote to selected banks emphasizing the need for prudence for assets in trading portfolios and indicated it could require increases in GRCL or issue directions where valuation/provisioning approaches were unsatisfactory. ### EC5 — early identification and management of deteriorating/problem assets - Onsite prudential reviews assess: credit quality; systems quality; adequacy of collection and problem-asset policies; collection strategies; structure and resources; delegated credit authority framework; problem asset recognition; and provisioning methodologies. - APRA discusses adequacy and flexibility of resourcing for collections and problem-asset management, expecting robust resource management and contingency plans. - Actions include collecting large banks' watch list reports, targeted onsite reviews for specific portfolios (e.g., commercial property, corporate, SME), increased frequency of discussions with chief risk officers, and tripartite contact on mortgagee in possession cases. - Supervisors track trends in asset quality data institutionally and industry-wide using dashboard reports and public delinquency sources. ### EC6 — supervisory access to classification and provisioning information - Banks submit quarterly prudential returns detailing impaired assets and movements in provisioning (ARF 220.0 and ARF 220.5). - Banks with credit risk grading systems but not accredited for IRB must include APRA among recipients of graded-portfolio information (AGN 220.4 paragraph 5). - IRB-accredited banks must regularly submit a comprehensive suite of prudential reports split by Basel II asset categories. - APRA may require further information as needed (e.g., management reports on asset quality). ### EC7 — power to require increases in provisions, reserves or capital - The Banking Act empowers APRA to direct banks to comply with prudential standards and to issue directions when a statutory trigger exists. - APS 220 permits APRA to require a bank to increase provisions, reserves or capital or to change policies/practices; paragraph 35 examples: - adjust valuation methodologies or practices; - increase levels of provisioning reported to APRA; or - hold higher levels of capital. - Paragraph 40 allows APRA to require amended policies/procedures, increase impaired assets specific provisions and GRCL, or otherwise increase capital. ### EC8 — assessment of adequacy of classification and provisioning; remedial powers - Off-site supervision and risk assessment include assessment of provisioning adequacy via ratio analysis. - On-site inspectors check adequacy of provisions in credit risk reviews; guidance assists supervisors in differentiating good and less good practices. - APRA has the power to require changes to achieve prudential outcomes (see EC2, EC6, EC7). ### EC9 — valuation of risk mitigants and collateral - Prudential standards (APS 112, APS 113) and APS 220/AGN 220.2 require policies/procedures for establishing, recording and reviewing collateral value; valuations must reflect net realizable value taking account of costs to realize collateral. - Recognized collateral support includes secured interests, mortgage insurance, cash collateral, guarantees, put options and interest servicing arrangements, but banks must demonstrate reliability of ascribed collateral value in a recovery situation. - Onsite reviews assess collateral management systems; additional attention was paid to banks with significant structured credit exposures during the global financial crisis. - Collateral management systems of largest banks were subject to a targeted review by external auditors under APS 310 for 2010/11. ### EC10 — criteria for identifying impaired assets - APS 220's definition of impairment aligns with AASB 139 (Australian equivalent to IAS 39), using accounting information as a starting point but permitting APRA to require prudential recognition of impairment beyond accounting treatment. - AGN 220.1 (paragraph 4) lists factors affecting collectability, including: - indications of significant financial difficulty of a party to a facility; - breach of contract, such as default or delinquency in interest or principal; - likelihood of bankruptcy or other financial reorganisation; - concessions in terms granted due to financial difficulties; - changes or trends in default rates on categories of facilities; - identified changes in collateral value; - disappearance of an active market in assets held by a bank relating to a counterparty; - any other matter suggesting the party may be unlikely to meet contractual obligations. - APS 220 limits scope for discretion in assessing impairment and requires documentation of procedures and judgments. ### EC11 — Board reporting on asset portfolio condition - Board reporting quality and frequency on asset quality is assessed during onsite credit risk prudential reviews; supervisors request Board packs, papers on emerging issues, audit and internal review reports. - Supervisory guidance focuses on: - types of information captured in credit risk reports and escalation; - trigger points for informing senior management and the Board about emerging credit risk issues; - examples where management/Board acted on credit risk issues. ### EC12 — individual assessment for large exposures - APS 220 allows individual or portfolio management of facilities and provisioning; paragraph 10 permits similar assessment methods, but APRA expects significant potential credit-loss facilities to be managed individually (paragraph 11). - No specific numeric level is prescribed; APRA agrees with each bank the size of credit to be managed individually. File reviews include examples of both individual and portfolio-managed exposures. ### Additional Criteria — AC1 (days past due and restructured facilities) - For assessing impairment APS 220 requires consideration of whether a facility is 90 days past due, excluding well-secured facilities (AGN 220.1 paragraph 18 defines "well-secured"). - Requirements for restoring facilities to non-impaired status are in AGN 220.1 (paragraphs 20–23); a facility impaired due to write-offs must be fully performing for six months (or three payment cycles, whichever is longer) before restoration. - Restructured facilities as defined in APS 220 and AGN 220.1 are reported quarterly in ARF 220.0; APRA has on occasion required banks to revise classification policies following onsite reviews and paid considerable effort to ensure robustness of re-ageing processes and hardship-related relief. ### Assessment of Principle 9 — Impairment, provisioning and internal controls - Assessment result: Compliant. - Comments: - Impaired assets are at a low level in the Australian banking system; strong management attention to delinquency was confirmed. - APRA guidance emphasizes loan serviceability over reliance on collateral; supervisors caution against over-reliance on asset-based metrics such as loan-to-value ratios. - Concern: APS 220 permits an ADI to exclude a facility from impairment if "well secured", though such facilities are separately reported to APRA and typically treated as non-performing by supervisors; recommendation that APRA review prudential standards on impairment. ### Principle 10 — Large exposure limits: essential findings - EC1: APS 221 defines connected counterparties (paragraph 11) including cross guarantees, common ownership, control, financial interdependency, or other connections as assessed by the bank; family members generally not treated as connected where independent retail relationships exist. - EC2: APS 221 defines a large exposure as exposure >= 10 percent of a bank's capital base (Level 1 and Level 2). Aggregate exposure limits (Paragraph 9) include: - 25 percent of capital base for non-government, non-bank, unrelated parties; - 50 percent of capital base for unrelated banks; - 50 percent of capital base for foreign parents and their subsidiaries, with aggregate exposure to non-deposit-taking subsidiaries capped at 25 percent of capital base. - Exposures include on- and off-balance-sheet claims, commitments and contingent liabilities. Prudential limits are "hard" and can only be exceeded with prior APRA approval; ADIs must pre-consult APRA for proposed exposures > 10 percent of capital base to non-government, non-bank counterparties (paragraph 19 APS 221). - Large exposures are reported quarterly (ARF 221.0) and verified under APS 310. - APS 222 imposes additional limits on exposures to related entities (individual and aggregate limits specified in APS 222 paragraph 32). - EC3–EC5: Boards are responsible for policies governing large exposures; APRA conducts onsite reviews and offsite monitoring; ARF reporting forms and dashboard systems enable supervisory assessment. APRA may impose higher capital ratios or require remedial measures for significant concentrations. ### Assessment of Principle 10 - Assessment result: Compliant. - Comments: - APRA has clear policies on large exposures and concentration risk and actively questions industry practices. - Recommendation: APRA should review its large exposures policy to ensure prudential standards reflect desired good practices, and consider exemptions currently permitted for interbank and sovereign lending. ### Principle 11 — Exposures to related parties: essential findings - EC1: APS 222 (paragraph 12) defines related entities as entities controlled by an ADI or the ultimate domestic parent, excluding foreign parents, their overseas subsidiaries and their directly owned non-ADI entities in Australia; APRA may deem other entities to be related on a case-by-case basis. APRA's definition does not capture individuals/natural persons (directors or staff). - Corporate law (Corporations Act 2001 section 208) imposes related-party restrictions and includes directors and family members in its definition of related parties for public companies. - EC2: APS 222 (Paragraph 14(a)) requires dealing with related entities on an arm's-length basis; Board must approve terms where inconsistent with benchmarks for unrelated entities (Paragraph 15) with documented justifications available to APRA. - EC3: APS 222 obliges Board approval for related-entity dealings with inconsistent terms and requires procedures for resolving conflicts (Paragraph 14(c)). APS 222 does not explicitly require Board approval for specified levels of write-off or explicitly require recusal of conflicted Board members, though APG 510 references Corporations Act recusal expectations. - EC4: No explicit requirement to exclude individuals from approval/managing exposure where conflicts exist; boards must establish policies governing dealings with related entities and ensure appropriate controls, but specific rules regarding connected individuals are absent. - EC5: APRA does not require capital deduction or collateralization of related-party exposures by default but large-exposure limits apply; APS 222 requires Board-approved policies setting prudent individual and aggregate limits for related entities and APRA can impose higher capital ratios or direct remedial actions. - EC6: APS 222 requires ADIs to have adequate systems and controls for identifying, reviewing, monitoring and managing related-entity exposures; independent credit review process is not explicitly mandated though guidance highlights the need for independent review processes. - EC7: Banks report quarterly on aggregate exposures to related entities via ARF 222.0; APRA may prompt investigation when concentrations are identified. ### Assessment of Principle 11 - Assessment result: Largely Compliant. - Comments: - Weaknesses: APS 222's definition of related parties excludes connected individuals; governance of lending to executives or directors relies on corporate law which does not cover all ADIs (e.g., proprietary companies) or senior executives. - Recommendations: - Amend APS 222 to widen the definition of related parties to explicitly include connected individuals and capture elements in the footnote to the core principle. - Enhance supervisory guidance to highlight risks of connected lending and ensure supervisory focus on conflict-of-interest processes. - Note: APS 222 excludes foreign parent(s) and certain overseas subsidiaries, though APRA has discretion on a case-by-case basis; foreign bank branches supply related-party information in Part C of ARF 222.0. ### Principle 12 — Country and transfer risks: essential findings - EC1: Boards and management must ensure policies/processes identify, measure, monitor and control country and transfer risk per APRA prudential standards and supervisory guidance. - APS 221 requires measures and prudent limits to monitor and control risk concentrations, extending to individual country exposure limits where applicable (paragraph 6 [iv]). - Banks report quarterly foreign country claims, off-balance sheet commitments and risk transfers via Reporting Form ARF 231.3 International Exposures, with claims reported on an immediate borrower basis by maturity and on an ultimate risk basis by country and counterparty sector; off-balance sheet data are split by derivatives, guarantees and credit commitments. - Information on risk transfers and country exposures is considered in regular analysis of prudential returns; Industry Analysis provides industry-wide country exposure data; onsite reviews can assess policies/processes for country and transfer risk. - Statistic: Offshore exposures represented 22 percent of the industry‟s total assets as at June *Source: IMF staff summary of APRA prudential standards and supervisory findings in _cr12313 - 220.5 Movements in Provisions for Impairment). Data are subject to external audit* ### 2011. Advanced banks that report more significant exposures are subject to more ### 2011. Advanced banks that report more significant exposures are subject to more intensive supervision. The major Australian banks account for approximately 78 percent of the banking system‟s international exposures. ### EC2 — Information systems, risk management, internal controls for country exposures - Onsite credit risk reviews provide regular opportunities for APRA to confirm that banks have information, risk management and internal control systems to accurately monitor and report country exposures, including adherence to relevant limits. - The frequency of risk reviews is determined on a risk based approach and country risk would not be a routine part of every credit risk assessment; for larger banks, reviews would be more targeted. - Portfolio risk management capabilities are more routinely considered in the context of a credit risk prudential reviews. - Targeted operational and Information Technology (IT) related risk reviews may provide support to views about the overall integrity of risk management information systems. - For banks with more significant country exposures, supervisory discussions include instances of limit breaches and associated remedial action. - The largest exposures are to New Zealand, the United Kingdom and the United States (approximately 60 percent of international claims reside in New Zealand and the United Kingdom). These exposures reflect important subsidiary operations in these countries. ### EC3 — Oversight of provisioning for country risk and transfer risk - Accepted international practices for setting provisioning include: - The supervisor (or some other official authority) decides on appropriate minimum provisioning by setting fixed percentages for exposures to each country. - The supervisor (or some other official authority) sets percentage ranges for each country, and the banks may decide, within these ranges, which provisioning to apply for the individual exposures. - The bank itself (or some other body such as the national bankers‟ association) sets percentages or guidelines or even decides for each individual loan on the appropriate provisioning. The provisioning will then be judged by the external auditor and/or by the supervisor. - Description and findings: - APRA expects banks themselves to set provisioning levels for all exposures, including international exposures, in accordance with the requirements of Prudential Standard APS 220 Credit Quality (APS 220). - APRA requires the level of provisions and the General Reserve for Credit Losses to be reviewed regularly to ensure that provisions and reserves are consistent with current expectations of credit losses. - APRA‟s offsite analysis incorporates financial, trend and peer group analysis. - Provisioning outcomes and methodologies, process and practices are reviewed on site. - Prudential returns applicable to asset quality and provisioning are subject to review by the appointed auditor in terms of Prudential Standard APS 310 Audit and Related Matters (APS 310). - A bank‟s external auditors will also consider provisioning levels as part of their annual audit of their financial accounts. ### EC4 — Timely supervisory information on country risk and transfer risk - APRA receives quarterly reporting international exposures ((Reporting Form ARF *Source: _cr12313 - 2011. Advanced banks that report more significant exposures are subject to more intensive supervision. The major Australian banks account for approximately 78 percent of the banking system‟s international exposures.* ### 231.3 International Exposures)). In addition, APRA‟s Industry Analysis unit takes an ### _cr12313 - 231.3 International Exposures ### Country and transfer risk (Principle 12) - Assessment: Compliant. - Findings: - Australia has few regulatory requirements specifically targeted at country and transfer risk; credit risk framework governed by Prudential Standard APS 220 and verified through on-site reviews. - Greater supervisory attention is devoted to larger banks with significant international exposures. - Material exposures to New Zealand, the United Kingdom and the United States and small, but increasing, exposure to Asia have been subject to targeted supervisory activity. - Given that 22% of exposures are non-domestic, the scale of country and transfer risk is not immaterial. - In November 2008 APRA wrote to all banks advising that it would be imprudent for banks' internal counterparty credit limits and monitoring processes to follow strictly the regulatory capital treatment for temporary government guarantees. - Recommendation: - APRA should reconsider the need for prudential requirements specifically directed at country risk and transfer risk, potentially building on guidance given in 2008 (see CP10). ### Market risk (Principle 13) - Assessment: Compliant. - Key standards and processes: - Prudential Standard APS 116 Capital Adequacy: Market Risk (APS 116) and Prudential Practice Guide APG 116 Market Risk cover traded market risk, including Basel 2.5 amendments. - Attachment A of APS 116 sets governance, trading book policy and valuation requirements. - APRA applies similar qualitative standards to foreign bank branches despite APS 116 not technically applying to branches. - Supervisory practices: - Onsite reviews for banks with trading exposures at least every three years; more frequent for large trading operations and internal model approval. - Market risk specialists support frontline supervisors on model assessments and opinions on traded and non-traded market risk. - Regular (usually quarterly) discussions between market risk executives, frontline supervisors and APRA market risk specialists for locally incorporated banks with large trading operations. - Requirements for banks: - Board approval of market risk policies and limits (APS 116). - Notification to APRA of changes to Trading Book Policy and material changes to risk measurement/management systems and market risk profile. - For locally incorporated banks with large trading operations and internal model approval: quarterly reporting of limit breaches and quarterly stress testing in APRA-specified format. - Independent review and validation of risk measurement systems at accreditation and at least once every three years (APS 116 Attachment C paragraph 16). - Supervisory powers: - Paragraph 21 of APS 116 allows APRA to require a bank to reduce market risk or increase capital; APRA has exercised this power. - Typical onsite review agenda items (valuation, control and reporting): - organisational structure, roles and responsibilities; - valuation policies and fair value methodology; - provisioning, reserving and other valuation adjustments; - rates testing thresholds; - unobservable prices and use of mark-to-model; - reporting frequency; - daily position reconciliations; - daily profit and loss production process and dispute resolution. - Comments: - Market risk within the Australian banking system is relatively low; major institutions are accredited for internal models for market risk. - Supervisory cooperation with host supervisors (e.g., UK FSA) supports group-wide consistency. ### Liquidity risk (Principle 14) - Assessment: Largely Compliant. - Key standards and guidance: - Prudential Standard APS 210 Liquidity and Guidance Notes AGN 210.1 (Liquidity Management Strategy), AGN 210.2 (Scenario Analysis), AGN 210.3 (Minimum Liquidity Holdings). - Banks must adopt either a "scenario analysis" approach or a "minimum liquidity holding" (MLH) approach. - Findings on supervisory requirements and practice: - Scenario analysis regime requires consideration of adverse contractual and behavioral cash flows including undrawn commitments and other off-balance sheet liabilities (paragraphs 7 and 8 of APS 210 and AGN 210.2). - MLH regime specifies eligible liquid assets as a percentage of liabilities; applied case-by-case and not applied to banks with significant non-retail off-balance sheet commitments (paragraph 9 of APS 210 and AGN 210.3). - Boards must approve liquidity management strategies and review them at least annually (APS 210, paragraphs 1 and 5). - APRA assesses liquidity strategies and can require modifications (APS 210 paragraph 4). - Onsite liquidity reviews are conducted, but frequency and duration are generally less than credit risk reviews (on-site reviews typically between one to three days; not necessarily annual even for major institutions). - APRA has encouraged self-assessment against the Basel Committee Principles of Liquidity Risk Management (November 2010 letter to ADIs). - Since late 2007 banks must prepare and submit an annual funding plan; APRA monitors performance against these plans. - APRA performs industry analysis of funding plans to identify systemic issues and benchmarks large banks against peers. - Specific expectations and reporting: - APRA requires maturity profiles of cash flows and documented assumptions (paragraph 6(b) and paragraph 8 of AGN 210.1). - If inflows from industry liquidity support schemes, standby facilities and intra-group funding are included, arrangements must be fully committed and irrevocable or demonstrable to an acceptable level of certainty (paragraph 3 of AGN 210.2). - Regular reports to APRA include details of unhedged foreign currency funding in USD, GBP, EUR, JPY, NZD. - APS 116 Market Risk reporting captures material open currency positions. - Planned and proposed changes: - APS 210 is being revised to incorporate the Basel Committee's 2008 Principles for Sound Liquidity Risk Management and Supervision and Basel III liquidity reform proposals; APRA proposed implementation mid-2012. - APRA currently proposes qualitative requirements of the Basel III package to become effective when revised APS 210 is implemented (planned for mid-2012). - Basel III metrics for the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) will follow the planned Basel implementation timetable of 2015 and 2018 respectively. - Introduction of the Committed Liquidity Facility (CLF) by the Reserve Bank of Australia to enable ADIs to meet LCR requirements from 2015; APRA expects ADIs to take all reasonable steps towards meeting their LCR through own balance sheet management before relying on the CLF. - Main supervisory concerns and recommendations: - Two areas for focus: frequency of on-site reviews for liquidity risk and accuracy of reporting of liquidity data. - On-site review coverage for liquidity is insufficiently deep and frequent to assess management and control culture; recommended topics for on-site review include intra-day horizons, internal pricing of risk, collateral management, funding diversification and group-wide liquidity management. - APRA must ensure all major banks (not only the four largest) can report reliable and comparable liquidity data on a daily basis if required. - Finalize the program of enhanced liquidity risk regime, including revised reporting standards to ensure firms can provide accurate, system-wide comparable data on a daily basis and ensure general principles of liquidity risk management are applied by all institutions. - Comments on system characteristics: - A notable feature is significant exposure to overseas wholesale funding; reliance on short-term wholesale funding has notably decreased. - APRA has enhanced liquidity reporting since the crisis (monthly standardized information since onset; fortnightly reporting since late 2011). - Assessment caveat: - The rating does not reflect Basel III (future standard). ### Operational risk (Principle 15) - Assessment: Compliant. - Framework and standards: - APS 310 Audit and Related Matters requires Boards and management to have risk management policies and processes to identify, assess, monitor and mitigate operational risk; annual review and Board/CEO declarations to APRA. - APS 231 Outsourcing and APS 232 Business Continuity Management address specific operational risks. - APS 114 Standardized Approach to Operational Risk and APS 115 Advanced Measurement Approaches (AMA) set capital and documentation requirements for operational risk. - AMA documentation requirements (APS 115): - outline robust operational risk management framework (Attachment A, paragraph 7); - describe the operational risk measurement system and data requirements (Attachment B, paragraph 10); - assess relevance of historical loss data (Attachment B, paragraph 17); - detail classification and regulatory treatment of operational risk-related credit and market risk losses (Attachment B, paragraph 26); - incorporate process to determine effect of insurance on operational risk (Attachment B, paragraph 45); - outline sensitivity analysis program for operational risk measurement model (Attachment B, paragraphs 50 and 51). - Supervisory structure: - Three specialist operational risk teams: Operational Risk Governance, Operational Risk Analytics and Information Technology Risk. - Frontline supervisors with access to specialists perform quarterly assessments and ongoing supervision; issues feed into PAIRS and Supervisory Action Plans (SAP). - Specific operational risk areas: - Business continuity and contingency plans governed by APS 232 and AGN 232.1; pandemic planning and IT security addressed in PPG 233 and PPG 234. - APRA reviews outsourcing risk via APS 231; prior consultation required for offshoring material business activities (APS 231, paragraphs 28–30). - IT risk assessments use an internal framework based on COBIT and guidance in PPG 234. - Reporting and notification: - Banks must inform APRA of material changes such as changes to group composition (APS 222), proposed acquisitions of more than 20 percent equity (APS 222 paragraph 35), material changes to risk management systems (APS 310 paragraph 24), outsourcing material activities (APS 231 paragraphs 28–29), and changes to internal operational risk capital models for AMA banks (APS 115 paragraph 9). - Larger banks submit internal operational loss data voluntarily every six months. - Legal risk and outsourcing: - Legal risk is included in APRA's definition of operational risk (APS 114 paragraph 5(d); APS 115 paragraph 5(c)) and is incorporated into supervisory assessments. - Outsourcing requirements in APS 231 include due diligence, structuring, monitoring, control environment and contingency planning; APRA may require changes if offshoring risks not adequately managed. - Comments: - APRA places high importance on operational risk, particularly IT, business continuity and outsourcing. ### Interest rate risk in the banking book (IRRBB) (Principle 16) - Assessment status and coverage: - APRA requires Board approval and periodic review of IRRBB strategy, policies and processes; Board oversight expected where IRRBB constitutes a major risk. - Five largest domestic banks are subject to Prudential Standard APS 117 Capital Adequacy: Interest Rate Risk in the Banking Book. - Requirements: - APS 117 Attachment A addresses governance and requires Board clarity on appetite and limits for IRRBB. - For standardized banks, APS 110 paragraph 6(a) requires adequate systems and procedures to identify, measure, monitor and manage risks on a continuous basis. - Banks must complete Reporting Forms ARF 117 Re-pricing Analysis quarterly; ARF 117.0 includes impact of a ±200bp parallel move in interest rates across the yield curve. - Models, validation and stress testing: - APS 117 Attachment B sets quantitative standards for advanced banks: measurement systems, modeling of re-pricing and yield curve risks, capital requirement, stress and validation. - Advanced banks must have comprehensive and rigorous stress testing programs, including consideration of breakdowns in modeling assumptions and scenarios based on sudden shifts in interest rates and yield curve shape. - For standardized banks there is no specified stress testing requirement beyond ARF 117 reporting. *Source: IMF assessment text from the supplied content unit.* ### Section 62 of the Banking Act allows APRA to obtain information from a bank and its ### _cr12313 - Section 62 of the Banking Act allows APRA to obtain information from a bank and its ### Interest rate risk in the banking book (IRRBB) — regulatory framework and reporting - Section 62 of the Banking Act allows APRA to obtain information from a bank and its subsidiaries, including the results of a bank‟s internal interest rate risk measurement systems. - APS 117 requirements: - Internal model for advanced banks must measure the maximum potential change in the economic value of the banking book as a consequence of changes in interest rates, for a 99 percent confidence level and over a one-year holding period. - Stress testing for advanced banks must include consideration of a breakdown of the bank‟s key modeling assumptions; results must be communicated to senior management and the Board or Board committee on a regular basis. - Prudential reporting and templates: - All banks report the impact of a standard ±200bp parallel move in interest rates in their quarterly submissions of ARF 117.0. - ARF 117.0 provides a breakdown of the re-pricing gap into 14 different time buckets and 35 different categories of assets and liabilities, separately for each currency; this analysis includes the impact of a 200bp parallel shock to the interest curves for each currency. - Standardized banks: - APRA applies APS 117 principles to standardized banks though there is no specified requirement; APRA internal guidelines require supervisors to assess the quality of a bank‟s stress testing. - Operational requirements for IRRBB management (advanced banks): - Independent IRRBB management function is required (paragraph 9 of Attachment A of APS 117) with reporting lines and responsibilities independent of activities that contribute to the bank‟s IRRBB profile. - Duties include: clearly documented roles and responsibilities; design and maintenance of the IRRBB management framework; ensuring implementation; continuous monitoring and regular reporting/analysis of internal model outputs. ### Supervisory assessment of internal capital measurement and stress testing (AC2, AC3) - AC2: Supervisor assesses whether banks' internal capital measurement systems adequately capture IRRBB. - APS 110 requires an Internal Capital Adequacy Assessment Process (ICAAP) ensuring capital is held against all risks consistent with the bank‟s risk profile; IRRBB is intended to be covered by ICAAPs. - APRA regularly reviews banks‟ ICAAPs as integral to supervisory activity and as input into setting a bank‟s prudential capital ratio (PCR) and PAIRS rating. - AC3: Supervisor requires stress tests to be based on reasonable worst case scenarios and to capture all material sources of risk, with a breakdown of critical assumptions; senior management must consider these results when establishing/reviewing policies, processes and limits for interest rate risk. - Apart from the standard ±200bp shift in prudential reporting, APRA requires reasonable but plausible stress scenarios to be incorporated into stress testing frameworks. ### Governance, internal control and segregation of duties (AC4; Principle 16 assessment) - AC4: Supervisor requires banks to assign responsibility for IRRBB management to individuals independent of trading/risk-taking activities or to ensure mechanisms to mitigate conflicts if such independence is absent. - APS 117 requires advanced banks to have an independent IRRBB management function responsible for framework design, implementation and monitoring, and for producing and analyzing regular internal model output reports. - Assessment of Principle 16: Compliant. - Comment: In general, most assets and liabilities in the banking book of Australian banks carry variable interest rates. ### Corporate governance and internal control (Principle 17) — essential criteria and findings - EC1 — Board and senior management responsibilities: - APRA imposes governance requirements under Prudential Standard APS 510 – Governance – applying to all authorized banks and NOHCs under the Banking Act 1959; APS 510 explicitly states the Board bears ultimate responsibility for governance. - APS 510 requires effective governance arrangements and specifies principles covering board composition, independence, board committees, internal audit, board renewal policy and remuneration. - Specific prudential standards (e.g., APS 220 – Credit Quality) set out the Board‟s responsibilities for particular risks and functions. - EC2 — Adequacy of internal controls: - APS 222 and APS 510 require the Board to ensure a group risk management system exists; Board must sign off on the adequacy of risk management systems annually. - APRA assesses internal control adequacy through ongoing supervisory activities including off- and on-site regulation, places reliance on external/internal auditors, and uses on-site inspections to assess segregation of duties, dual control frameworks, reconciliation processes, escalation processes and resourcing adequacy. - EC3 — Board and senior management responsibility for control environment: - APS 510 requires directors and senior managers to have the full range of skills for effective and prudent operation; Boards must collectively have necessary skills to understand bank risks and legal/prudential obligations. - APS 310 requires annual attestation by the Board and Chief Executive Officer that the risk management system is operating effectively. - APRA‟s onsite and offsite reviews assess Board and senior management understanding through discussions, minutes review, prudential consultations and meetings with the Board. - EC4 — Power to require changes in Board and senior management composition: - Under section 23 of the Banking Act, APRA may remove a director or senior manager where the person: - Does not meet one or more of the criteria for fitness and propriety as set out in the relevant prudential standards, principally Prudential Standard APS 520--Fit and Proper. - Is a disqualified person by virtue of section 21 of the Banking Act. - Is otherwise a disqualified person (as defined in section 20 of the Banking Act). - APRA may direct a bank to remove a responsible officer it determines is not fit and proper, even if the bank has assessed the officer to be fit and proper. - EC5 — Balance of skills/resources between back office/control functions and front office: - Onsite inspections assess adequacy and appropriateness of staff resources, skills, organization structure and inter-office communication; assessments of mitigating controls relative to front office risks are routinely made. - EC6 — Compliance function: - No explicit regulatory requirement for a permanent compliance function; in practice, all domestically owned banks have such functions and foreign branches have local or regional compliance units. - APRA assesses compliance function effectiveness during on-site inspections, including independence, reporting lines, Board oversight, and adequacy of information provided to the Board. - EC7 & EC8 — Internal audit function requirements and assessments: - APS 510 requires an independent and adequately resourced internal audit function; APRA can exempt a bank if alternative arrangements meet objectives (e.g., reliance on head office internal audit for foreign branches). - Internal audit objectives include evaluation of adequacy and effectiveness of financial and risk management frameworks and must have unfettered access to all business lines and support functions. - Supervisors routinely review internal audit to ensure resources, independence (including reporting lines to the Board Audit Committee), full access to staff and records, risk-based methodology, audit planning based on its own risk assessment, and authority to assess outsourced functions. - Additional criteria (board composition and committees): - AC1: APS 510 requires a board to have a minimum of five directors of which a majority must be independent directors at all times; the Chairman must be an independent director; a majority of directors present and eligible to vote at a Board meeting must be non-executives. - AC2: APS 510 requires the internal audit function to have a reporting line and unfettered access to the Board Audit Committee. - AC3: Paragraph 56 of APS 510 states the Board Audit Committee must have at least three members; all members must be non-executive directors and a majority must be independent. - AC4: APS 520 – Fit and Proper – requires a bank to notify APRA, within 10 business days, if it becomes aware that a responsible person (including Board member or senior management) is considered not fit and proper. - Assessment of Principle 17: Compliant. - Comment: Re EC6. APRA has determined that banks have a permanent compliance function in practice, but does not have a specific requirement to this effect; recommendation that APRA introduce a specific requirement similar to that for the internal audit function. ### Abuse of financial services / AML/CTF (Principle 18) — responsibilities and supervisory roles - EC1 — Legal and institutional framework: - AUSTRAC is Australia‟s AML/CTF regulator and specialist financial intelligence unit (FIU), established in 1989 under the Financial Transactions Reports Act 1988 (FTR Act) and expanded under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). - AUSTRAC supervises regulated entities‟ compliance with customer identification, reporting, record keeping and other requirements under the AML/CTF Act and FTR Act; legislative framework is supported by prescriptive rules and detailed guidance. - As prudential supervisor, APRA ensures banks have adequate systems and procedures to identify, manage, monitor and control all risks, including risks arising from criminal activities. - EC2 — Bank AML/CTF programs and AUSTRAC oversight: - Banks must have AML/CTF programs including appropriate risk-based systems and controls, risk awareness and due diligence training for staff. - AUSTRAC undertakes off- and on-site assessments of banks‟ AML/CTF risk assessments, systems and governance, customer identification processes, etc. - Banks are required to provide reports to AUSTRAC on suspicious matters, cash transactions at or above a $ 10,000 threshold and instructions for international funds transfers. - AUSTRAC reviews on a risk assessment basis and pays attention to situations where fewer reports are lodged compared to peer volumes. - EC3 — Reporting to supervisor when material: - Section 62A of the Banking Act obliges banks to notify APRA immediately if a bank considers that it may not be in a sound financial position or as soon as is practicable if it has or is likely to breach a prudential standard. - EC4 — Know-your-customer (KYC) policies and record retention: - AML/CTF Act obligations include customer identification and verification of identity, record keeping, ongoing customer due diligence and transaction monitoring. - AML/CTF Rules outline specific requirements; the AML/CTF Act requires records must be retained for seven years after the end of the bank‟s relationship with the relevant customer. - KYC program essential elements (as described): - customer acceptance policy identifying business relationships the bank will not accept; - customer identification, verification and due diligence program including verification of beneficial ownership and risk-based reviews; - policies to monitor and recognize unusual or potentially suspicious transactions, particularly of high-risk accounts; - escalation to senior management on entering/maintaining high-risk relationships (e.g., politically exposed persons); - clear rules on records to be kept on consumer identification and individual transactions and their retention period (such records should have at least a five year retention period). - EC5 — Correspondent banking due diligence: - Banks must gather sufficient information about respondent banks to fully understand their business, customer base and supervision; banks should not establish/continue correspondent relationships with foreign banks lacking adequate controls or effective supervision or with banks considered to be shell banks. *Source: _cr12313 - Section 62 of the Banking Act allows APRA to obtain information from a bank and its* ### Section 97of the AML/CTF Act provides that before a financial institution enters into a ### _cr12313 - Section 97of the AML/CTF Act provides that before a financial institution enters into a ### Correspondent banking: legal requirements and AML/CTF Rules - Section 97 of the AML/CTF Act: before a financial institution enters into a correspondent banking relationship with another financial institution, the first financial institution must carry out a preliminary risk assessment and, where warranted, a more extensive due diligence assessment. Senior officer approval is required for any new relationship. - Section 98 of the AML/CTF Act: correspondent banking relationships must be subject to regular risk assessments and, where warranted, due diligence assessments. Responsibilities under correspondent banking relationships must be documented. - Sections 95 and 96 of the AML/CTF Act: prohibit banks entering into corresponding relationships with shell banks; legislation requires termination of any existing relationship within 20 days of becoming aware that the other party is a shell bank. - Chapter 3 of AML/CTF Rules (correspondent banking) clarifies: - what matters must be addressed when conducting a due diligence assessment before entering into a correspondent relationship; - what matters must be addressed when conducting regular due diligence assessments on existing relationships; and - other issues about correspondent banking relationships. ### Supervisory confirmation of controls (EC6) - The supervisor periodically confirms that banks have sufficient controls and systems in place for preventing, identifying and reporting potential abuses of financial services, including money laundering. - AUSTRAC carries out inspections of banks (and other entities providing designated services) on a risk assessment basis to monitor compliance with the provision of the AML/CTF Act and the AML/CTF Rules. - APRA, in its inspections of banks, seeks to assess the robustness of banks' systems for the recognition and prevention of fraud risk, both internally and externally generated. ### Enforcement powers (EC7) - The supervisor has adequate enforcement powers (regulatory and/or criminal prosecution) to take action against a bank that does not comply with its obligations related to criminal activities. - AUSTRAC has a range of enforcement powers available under the AML/CTF Act and AML/CTF Rules ranging from administrative to civil and criminal action. To date, there has been no civil or criminal action against banks. - The highest sanction imposed was the acceptance of an Enforceable Undertaking. (Definition provided: a written undertaking given by a person in connection with a matter in which AUSTRAC has a function or power. If the undertaking is breached, a Court may make orders including directing compliance, directing payment of compensation or other monies.) ### Internal controls, governance and KYC/AML program requirements (EC8) - Supervisor must be satisfied that banks have: - requirements for internal audit and/or external experts to independently evaluate the relevant risk management policies, processes and controls, with supervisor access to their reports; - established policies and processes to designate compliance officers at the management level, and appointed a relevant dedicated officer to whom potential abuses of the bank's financial services (including suspicious transactions) shall be reported; - adequate screening policies and processes to ensure high ethical and professional standards when hiring staff; - ongoing training program for their staff on KYC and methods to detect criminal and suspicious activities. - APRA's APS 510 – Governance – requires a bank to have an independent and adequately resourced internal audit function. Additionally, each year external auditors are required to provide assurance on banks' risk management systems. Audit reports are readily available to APRA and routinely obtained. - Part 8.5 of the AML/CTF Rules requires reporting entities to designate a person as the AML/CFT compliance officer at management level whose function would include the receipt of reports of potential abuses of the bank's financial services. - APRA assesses robustness and appropriateness of banks' recruitment processes during on-site operational risk reviews, including background checks for staff in key positions. - Part 8.2 of the AML/CTF Rules specifies that banks' AML/CTF programs must include a money laundering/terrorism financing risk awareness training program for employees that meets the requirements set out in the AML/CTF Rules. The training program should be designed to give appropriate training at reasonable intervals to keep staff up to date on the risks in question. ### Reporting obligations and management information (EC9) - Supervisor determines that banks have clear policies and processes for staff to report problems related to abuse of the bank's financial services to local management or the relevant dedicated officer or both, and that banks have adequate management information systems to provide managers and the dedicated officers with timely information on such activities. - Section 41 of the AML/CTF Act requires banks to report suspicious matters to AUSTRAC in a Suspicious Matter Report (SMR). The obligation to lodge an SMR arises when a bank provides or proposes to provide a designated service to a customer and because of the circumstances the bank suspects on reasonable grounds that information that the bank has may be relevant to investigation of, or a prosecution of a person, for an offence against the law. (This obligation goes beyond AML/CTF offences and could include bribery.) - In 2010/11, AUSTRAC received a total of 44, 775 reports of suspicious matters and transactions. - AML/CTF Rules require banks to provide AML/CTF risk awareness training designed to enable employees to understand the obligations of the bank, including timely reporting of suspicious matters. - APRA, as part of supervisory activities, ensures banks have sound risk management frameworks including adequate employee screening mechanisms, codes of conduct and maintained awareness and training capabilities. ### Protection for good-faith reporting (EC10) - Laws and regulations ensure that a member of a bank's staff who reports suspicious activity in good faith either internally or directly to the relevant authority cannot be held liable. - Section 235 of the AML/CTF Act: banks (together with bank officers, employees and agents) enjoy statutory immunity from any action, suit or proceeding (whether criminal or civil) in relation to anything done, or omitted to be done, in good faith: - a) in carrying out applicable customer identification procedures under the AML/CTF Act; - b) in fulfilment, or purported fulfilment, or a requirement under the AML/CTF Act not to provide a designated service, or not to continue to provide a designated service; or - c) in compliance, or in purported compliance, with any other requirement of the AML/CTF Act (and any associated regulations and rules). ### Information sharing and liaison with authorities (EC11) - The supervisor is able to inform the financial intelligence unit and, if applicable, other designated authority of any suspicious transactions. In addition, it is able, directly or indirectly, to share with relevant judicial authorities information related to suspected or actual criminal activities. *Source: _cr12313 - Section 97of the AML/CTF Act provides that before a financial institution enters into a* ### Section 56(5) of the APRA Act together with section 5(j) of the Australian Prudential ### _cr12313 - Section 56(5) of the APRA Act together with section 5(j) of the Australian Prudential ### Information exchange and EC12 - Section 56(5) of the APRA Act together with section 5(j) of the Australian Prudential Regulation Authority Regulations provides for the exchange of information between APRA and AUSTRAC. - APRA may also exchange information with: - the Australian Federal Police, - the Police Forces of all states and territories, - the Australian Crime commission. - The supervisor is able, directly or indirectly, to cooperate with relevant domestic and foreign financial sector supervisory authorities or share with them information related to suspected or actual criminal activities where this information is for supervisory purposes. - Description and findings re EC12: - APRA has entered into an MOU with AUSTRAC which provides for the exchange of information, among other things. - APRA and AUSTRAC meet twice yearly as part of the AUSTRAC-APRA Coordination Committee to discuss common findings in assessments, policy issues and updates on regulatory matters. - Under section 132 of the AML/CTF Act, AUSTRAC is permitted to share information with the governments of foreign jurisdictions; in practice, this generally comprises AUSTRAC‟s FIU counterparts following the establishment of a formal exchange instrument. ### Additional criteria — AC1 - AC1: If not done by another authority, the supervisor has in-house resources with specialist expertise for addressing criminal activities. - Description and findings re AC1: - Neither APRA nor AUSTRAC have the power to conduct criminal investigations. Such cases are referred to law enforcement agencies. ### Assessment of Principle 18 - Assessment: Largely Compliant - Comments and findings: - The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 introduced a detailed framework for oversight and monitoring of AML/CTF measures, incorporating, for example, the FATF Principles. - The full suite of provisions of the 2006 Act did not become fully operational until 2009 to give banks and other relevant entities time to introduce/amend AML/CTF systems. - AUSTRAC, through the 2006 Act and related Rules, has introduced a very solid base for the regulation of money laundering and counter-terrorism financing activities, with a risk-based approach to supervision and proactive supervision including regular bank reviews. - Example of supervisory intensity: the four largest banks which account for the vast majority of reported suspicious matters by banks are inspected twice yearly; reviews are theme based (e.g., KYC, correspondent banking, transaction reporting, employee training programs). - AUSTRAC identified the need for some banks to introduce more advanced technology to help identification and transaction reporting processes; some requirements are being dealt with manually. - The need for increased technology is the basis for the „largely compliant‟ rating to comply adequately with EC2 (supervisor must be satisfied that banks have in place adequate policies and processes that promote high ethical and professional standards and prevent use for criminal activities). - The first mutual evaluation report for Australia was completed in October 2005. Follow-up reports were prepared (latest in May 2012) addressing shortcomings, particularly Recommendation 5 (verifying beneficial ownership information). Australia committed to fully addressing them by August/September 2012 and to seek removal from the regular follow-up process in October 2012. - Since the introduction of the 2006 Act, the previous weakness whereby there were difficulties for APRA in exchanging information with AUSTRAC has been addressed. ### Principle 19 — Supervisory approach (overview) - Principle: Supervisors should develop and maintain a thorough understanding of individual banks and banking groups, and of the banking system as a whole, focusing on safety, soundness, and stability. ### EC1 — Understanding individual banks and groups - EC1: Supervisor has policies and processes to develop and maintain a thorough understanding of risk profile of individual banks and banking groups. - Description and findings re EC1: - APRA adopts a forward looking, risk-based approach (see APRA‟s public document, „Supervision Blueprint‟) and does not seek a zero failure regime. - Supervisors conduct offsite and onsite assessments supported by comprehensive internal guidance to develop an overall risk profile for each regulated entity. - Risk profiles are summarised in a PAIRS (Probability and Impact Rating System) assessment and rating. - PAIRS rating feeds into a Supervisory Oversight and Response System (SOARS) stance determining supervisory intensity. - PAIRS assessments feed into Supervisory Action Plans (SAPs); results from SAPs feed into future PAIRS and SAP revisions. - PAIRS assessments and SAPs are determined at an entity level; group-wide assessments and plans generated when appropriate. - Supervisory activities include onsite review, prudential consultations, regular offsite analysis; ad hoc meetings with Boards/senior management; for major firms at least an annual meeting with the Board. ### EC2 — Monitoring system-wide trends and non-bank developments - EC2: Supervisor monitors and assesses trends, developments and risks for the banking system as a whole and considers developments in non-bank financial institutions via frequent contact with their regulators. - Description and findings re EC2: - APRA has developed approaches to assess industry-wide or systemic perspectives, including: - Industry Analysis team embedded within supervisory divisions contributing to: - comprehensive reviews (at least annually) of the banking industry, - ongoing development and refinement of industry dashboards, - managing and maintaining the industry risk register, - coordinating industry-focused stress testing. - Industry risk registers that record thematic industry risks with a planning horizon typically a one to two year horizon; the register is used as an input into PAIRS assessments. - Internal industry groups (cross-divisional) as key forums to identify emerging issues and review risk registers; Industry Group governance and review of the industry risk register is a primary function. - Industry risk management framework to assist identification and action on significant emerging thematic or macroprudential risks. - Regulatory cooperation with Reserve Bank of Australia (RBA) and Australian Securities and Investment Commission (ASIC); RBA/APRA Coordination Committee provides a regular high-level forum; APRA comments on RBA‟s half-yearly Financial Stability Review (FSR). - Integrated supervision across banking and insurance supports common understanding of risks; historical events (collapse of an insurance entity in 2001) strengthened cooperative working with RBA. - Supervisors’ awareness and communication: - Reporting to supervisors and APRA senior management based on ADI Industry Group reporting and peer analysis (e.g., liquidity and funding). - Peer discussions typically every 6 weeks. - Supervisors have access to financial, industry and economic information via a research resources portal on APRA‟s intranet. - Management Group and Executive Group meetings discuss regular reports including annual ADI industry group updates, monthly PAIRS reports, semi-annual PAIRS reports, and SAPs of major entities. ### EC3 — Methodology for ongoing risk assessment and prioritization - EC3: Supervisor uses a methodology to determine and assess on an ongoing basis the nature, importance and scope of risks to banks and banking groups; methodology covers business focus, risk profile, internal control environment and permits comparisons between banks; supervisory work is prioritized based on these assessments. - Description and findings re EC3: - APRA primarily uses the PAIRS methodology to assess probability and impact of entity failure; PAIRS transforms into SOARS stance and SAP. - PAIRS assesses probability of failure (inherent risks, management and controls, capital support) and impact of failure (measured by balance sheet size; supervisors may adjust if impact disproportionate to asset size). - Risk categories assessed include: - Board; - Management; - Risk Governance; - Strategy And Planning; - Liquidity Risk; - Operational Risk; - Credit Risk; - Market And Investment Risk; - Insurance Risk; - Capital Support – including assessments of capital surplus, earnings and access to additional capital. - Six elements (strategy and planning, liquidity, operational, credit, market and insurance risk) are assessed for both inherent risk and management and control risk. - The ratings are highly granular: it is a 41 point scale; the scale is logarithmic not linear. - A net risk is assessed for all risk categories and a significance weight is attached to the risk for the individual institution. - Supervisory judgement and discretion are important; guidance is provided but does not create an automatic, process-driven approach. - Each entity is assigned one of five PAIRS ratings: Low, Lower Medium, Upper Medium, High, or Extreme. - APRA increased frequency of PAIRS reviews since the global financial crisis began. - APRA uses “transition matrices” of institutions under the SOARS/PAIRS framework as a key measure of supervisory performance. - PAIRS assessment generates an indicative prudential capital ratio (PCR); PCR is typically reviewed annually; PAIRS assessment is given primacy over APRA‟s Pillar 2 approach in generating the actual PCR. - PAIRS is intended as a continuous process; APRA is undertaking a major project to launch a new integrated IT system to support continuous PAIRS updates. - Consistency-promoting processes: - Reference points: indicative significant weights of a risk for a “typical” entity in any peer group; supervisors must articulate reasons for departures. - Internal benchmarking: promotes consistent PAIRS assessment practices; benchmarking sessions typically every 4 to 6 weeks with approximately 20 staff, covering 6-8 entities per session. - Sign off protocol: two reviewers for all PAIRS assessments and SAPs, with seniority of sign-off depending on PAIRS/SOARS rating. - Supervisory Action Plans (SAPs) detail supervisory activities; results feed into future PAIRS and SAP revisions. - Four supervisory stances under SOARS: „Normal‟, „Oversight‟, „Mandated Improvement‟, or „Restructure‟: - „Normal‟ and „Oversight‟ not considered likely to fail; „Oversight‟ subject to more frequent and targeted/specialist onsite reviews. - „Mandated Improvement‟: firms not expected to remain long; remedial action may include directions, increased capital requirements, prohibiting acquisitions, requiring business plan revision, appointing specialist investigators. - „Restructure‟: most severe supervisory approach; full enforcement powers may be used and withdrawal of authorisation is likely. ### EC4 — Confirming compliance with prudential regulations - EC4: Supervisor confirms banks' and banking groups' compliance with prudential regulations and other legal requirements. - Description and findings re EC4: - APRA receives regular prudential reporting from supervised institutions. - Baseline supervisory approach requires submission of information mandated by prudential standards and at minimum a quarterly risk analysis. - Depending on PAIRS impact rating, an institution will have at minimum an annual review of its PAIRS assessment and SAP. - Full prudential review (onsite) and prudential consultation has a minimum three year cycle. - There is a small degree of tolerance (3 months) to permit timely completion of supervisory activities according to minimum timetable prescribed by the impact rating. - Submission of returns and financial analysis is not subject to extended tolerance; extensions granted only for exceptional circumstances (e.g., local disaster such as flooding). - Banks are required to submit annual declarations from the Chief Executive Officer, endorsed by the Board, attesting that risk management systems to ensure compliance are operating effectively and are adequate (refer to APS 310). - Appointed auditors submit an annual report on matters relating to APRA‟s data collections and internal controls at entity and consolidated banking group levels. ### EC5 — Notification of substantive changes - EC5: The supervisor requires banks to notify it of any substantive changes in their activities, structure and overall condition, or material adverse developments including breach of legal or prudential requirements. - Description and findings re EC5: - [Description and findings re EC5 appear in the source but were not included in the supplied excerpt.] *Italic source: _cr12313 - Section 56(5) of the APRA Act together with section 5(j) of the Australian Prudential* ### Section 62A of the Banking Act 1959 (Banking Act) requires a bank to provide ### _cr12313 - Section 62A of the Banking Act 1959 (Banking Act) requires a bank to provide ### Legal and reporting requirements - Section 62A of the Banking Act 1959 requires a bank to provide immediate notice to APRA if it or any member of its group may not be in a sound financial position. - The same section requires a bank to report any significant breaches of prudential standards to APRA as soon as practicable. The section defines “significant” taking into account both impact and frequency. - The Financial Sector (Shareholdings) Act 1998 (FSSA) requires the Australian Treasurer’s approval of an acquisition that gives rise to a person holding a stake of greater than 15 percent of a bank. - Section 63 of the Banking Act requires the Australian Treasurer’s consent for any significant restructuring of a bank, which would include the sale or disposal of business. - Paragraph 8 of Prudential Standard APS 222 Associations with Related Entities (APS 222) requires a bank to advise APRA in advance of any proposed changes to the composition or operations of the group with the potential to materially alter the group’s overall risk profile, including any proposed changes to the bank’s standalone operations. ### APRA information systems and data processes (EC6) - APRA’s information systems provide an extensive range of tools to support supervisory work; major sources include: - Entity based information derived from reported data: - Baseline reports – providing data for all reporting institutions; data available on both consolidated and individual entity basis. - Micro strategy reports – similar to baseline reports but presented through charts and graphics. - Exception reports. - Industry reports. - Industry Risk Register. - APRA ADI Industry Group updates. - Analysts toolkit links to public information including: - RBA quarterly statistics. - RBA Financial Stability Report. - Broker Reports. - In-house systems and functions: - In-house built system captures high-level risk assessments and ratings scores, calculates the overall risk of failure score, derives PAIRS ratings and determines a SOARS supervisory stance. - Activity and Issues Management System (AIMS) records prudential reviews and consultations and key dates; forms the basis for management reports. - Contacts@APRA customer relationship management system maintains entity-related information including key persons and assigned supervisors. - System integration and upgrades: - APRA is upgrading systems to better integrate PAIRS and Supervisory Action Plans and to facilitate capture and management of information. - Reporting and data quality: - Banks report electronically via Direct to APRA (D2A) which includes pre-submission data quality checks and requires explanations of significant movements of key data items. - Additional data quality checks are completed after submission by APRA’s Statistics Unit; these checks (including responses) are undertaken within the first two weeks of the submission date. - A secure online breach reporting system is available and connected to AIMS; entities may also report breaches using other methods. ### Forward-looking supervisory methodology (AC1 / Principle 19) - PAIRS (Probability and Impact Rating System) assessments and ratings are central to monitoring changing risk profiles and identifying emerging risks. - PAIRS assessments must consider all relevant information including the bank, peer entities, industry and broader economy; common and emerging themes are identified. - Material matters with potential industry-wide implications are added to the industry risk register and assigned to a risk owner responsible to APRA’s Executive Group for an action plan. - Supervisory Action Plans (SAPs) outline supervisory activities addressing risks highlighted in PAIRS assessments. - Assessors’ observations: - Supervisors were alert to emerging issues, identified indicators to monitor, and set clear timelines to explore or challenge issues. - APRA supervisors possess a commanding and comprehensive understanding of banks and banking groups. - PAIRS separates assessment of inherent risk from quality of management control. - PAIRS framework was fundamentally refreshed in 2008. - Supervisory Framework Team reinforces identification and evolution of good supervisory practices. - APRA’s data tools are extensive and accessible; further IT integration between PAIRS, SOARS and SAPs is planned. - APRA’s internal organisational structure does not segregate banking from insurance or superannuation entities; APRA is positioned to analyse inter-sectoral risk relationships and should develop this area further, using the “Level 3” (conglomerate) approach as a platform. ### Supervisory techniques: on-site and off-site mix and processes (Principle 20, EC1–EC8) - General approach: - On-site and off-site functions are integrated, performed by frontline supervisors supported by specialist risk staff. - Supervisory activity includes offsite analysis, detailed onsite reviews of specific risks, and meetings with auditors, senior management and Boards. - Frequency and baseline expectations: - Frequency of prudential activities is driven by PAIRS impact rating; example cycles: - Prudential review would be at least annual for an “extreme” bank. - A three year cycle might be agreed for a bank in the “medium” or “low” category. - All firms are subject to quarterly financial analysis and annual review of PAIRS and SAPs. - Supervisory Action Plans (SAPs): - Require supervisors to prioritise key risks and determine activities to address them. - Intensity influenced by SOARS stance derived from PAIRS. - SAPs might include increased reporting or meetings with senior management or the Board. - Management oversight and benchmarking: - Written assessments are subject to sign-off protocols with higher sign-off for larger entities or where PAIRS changes. - Monthly PAIRS rating reports produced for APRA’s Executive Group. - SAPs for peer groups presented to the Executive Group periodically. - In-house benchmarking exercises promote consistency of PAIRS ratings and supervisory actions; facilitated by the Supervision Framework Team (SFT). - Detailed on-site process guidance (EC2 / EC3): - APRA framework includes procedural documents for prudential reviews, consultations and Quarterly Risk Reviews (QRR). - Onsite process steps include scoping, review conduct, closing meeting, documentation, sending formal reports to banks, and recording follow-up in AIMS. - Offsite QRR guidance outlines creation of an outlook (stable or positive) and template areas for consideration; supervisors must consider APRA-submitted data and other relevant information. - Prudential consultation procedure includes detailed logistics: planning meeting, scoping, agenda, attendance, pre- and post- sessions, briefing packs, preparation of notes, updating PAIRS and SAP, and drafting reports. - Use of on-site work (EC3): - Onsite reviews verify corporate governance, determine reliability of information where necessary, obtain additional information, and monitor follow-up on supervisory concerns. - External auditors provide assurance on reliability of data to APRA under APS 310; APRA may conduct its own accuracy reviews or commission external experts for targeted reviews if risks are significant. - Findings classified as requirements, recommendations, suggestions or requests for further information; supervisors monitor compliance and timetables; follow-up onsite reviews scheduled for material risk issues. - Off-site analysis (EC4): - QRR is cornerstone of offsite analysis using reported financial information and public sources; feeds into PAIRS and SAP and informs on-site work. - APRA uses standard reports (“dashboards”) for peer-group analysis and identifies outliers; coverage of these reports is being increased. - Industry Analysis unit examines emerging trends; outputs can guide thematic onsite reviews across banks. - Contact with bank governance and management (EC5–EC6): - Baseline supervision ensures minimum contact; prudential consultations focus on strategy, performance, capital and key issues. - Material concerns raised via meetings and written reports to CEO or Board; for major banks prudential consultations typically annually and APRA meets Boards of major banks at minimum annually. - PAIRS assessment includes rating quality and effectiveness of Board and management; supervisory guidance requires consideration of Board composition and fitness. - Banks must lodge details of responsible persons when changes occur; supervisors review for PAIRS implications. - Evaluation of internal audit (EC7): - PAIRS requires assessment of internal audit function including structure, resources, independence, Audit Committee oversight, approach, plan and reporting. - Supervisors review internal audit findings and meet internal auditors during prudential reviews; APRA primarily relies on its supervisory processes rather than full reliance on internal audit for prudential supervision. - Communication of findings (EC8): - APRA requires a letter/report after onsite reviews outlining findings, remedial actions, updated PAIRS rating and SOARS stance, sent to CEO or Chair. - Closing meetings are standard after onsite reviews. - Offsite-identified material concerns are promptly raised with management and, if warranted, reported in writing to CEO/Board. ### Operational observations and resource guidance - Supervisory sign-off, reporting and executive oversight processes are embedded; monthly reporting of PAIRS ratings and periodic presentation of SAPs to Executive Group. - Assessors’ timing examples for on-site reviews: - A credit risk themed on-site review might take 5 days. - A liquidity risk review would typically be shorter, i.e., 2-3 days. - Assessors’ recommendation: - Consider allocating a greater proportion of resources to some longer and deeper on-site reviews to provide greater assurance through direct on-site checks beyond document review. ### Assessments and conclusions - Assessment of Principle 19: Compliant. - APRA supervisors have comprehensive understanding of banks; PAIRS framework and supervisory practices are strong; further IT integration planned. - Assessment of Principle 20: Compliant. - APRA conducts a well planned and executed approach to on- and off-site supervision; quality of reviews and follow-up is very high; frequency and intensity of contact increased since the Global Financial Crisis. *Source: _cr12313 - Section 62A of the Banking Act 1959 (Banking Act) requires a bank to provide — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12313.pdf* ### Section 62 of the Banking Act confers on APRA the right to obtain information from ### _cr12313 - Section 62 of the Banking Act confers on APRA the right to obtain information from ### Legal powers to collect information (Section 62; FSCODA) - Section 62 of the Banking Act confers on APRA the right to obtain from banks, (as well as from authorized non-operating holding companies (NOHCs)), on both a solo and consolidated basis, any information it believes is necessary for it to carry out its statutory duties. - Under section 13 of the Financial Sector (Collection of Data) Act 2001 (FSCODA), APRA is empowered to collect from banks any information which it considers necessary to carry out its statutory function. - Information collected includes: detailed profit and loss accounts and balance sheets, capital adequacy, liquidity, large exposures, calculations, asset quality/impairment data, exposures to related parties, details on market risk, interest rate risk, etc. - The information is received on a solo and consolidated basis as required. ### Reporting standards and presentation (EC2) - The supervisor provides report instructions that clearly describe the accounting standards to be used in preparing supervisory reports. - Reporting standards and the instructions accompanying the reporting forms specify the information that APRA requires, the form in which it is to be presented and the accounting standards under which the information is to be prepared. - Australian Accounting Standards are based on International Financial Reporting Standards (IFRS) and were adopted in January 2005 (There are no differences in substance between both). ### Valuation rules and prudential conservatism (EC3) - APRA specifies the valuation method to be applied in its reporting standards. - Financial assets and liabilities can be measured using fair value or at cost or amortized cost, as appropriate, consistent with Australian Accounting Standards. - APRA may require a more conservative approach to valuation rules when warranted; for example, for calculating capital adequacy ratios, banks may be required to hold additional amounts of provision as a general reserve for credit losses. ### Reporting frequency and comparability (EC4, EC5) - The majority of reporting standards require quarterly reporting, although monthly, half-yearly and annual reports are also specified for certain standards. - APRA may, by notice in writing, change the reporting periods for a particular bank to require more frequent or less frequent provision of information when it considers this necessary. - Regular quarterly and annual information APRA collects from all banks and banking groups is in a standardized form and is required to be submitted for specified periods, enabling peer-group comparisons for the same dates and periods. ### Scope of information, access to records and persons (EC6, EC7) - APRA has the power to request and receive any relevant information from banks and any of their related companies, irrespective of their activities, where it believes the information is material to the financial situation or risk assessment of the bank or banking group. This includes internal management information. - Under section 62 of the Banking Act APRA has full access to all bank records and is able to request information from, and meet with, all relevant officers (directors, management and staff) as required. - Section 16B of the Banking Act empowers APRA to require an auditor of a bank to provide information or produce books, accounts or documents about a bank that APRA considers will assist it in performing its prudential supervisory role. - Paragraph 9 of Prudential Standard APS 510 – Governance – explicitly states that members of the Board and senior management must be available to meet with APRA on request. ### Enforcement, timeliness and accuracy (EC8) - Reporting standards require submission of data for specific reporting periods and timeframes. - Failure to abide by the requirements of a reporting standard is potentially subject to a criminal sanction. - Section 14 of FSCODA requires the Principal Executive Officer of a bank to notify the Board of the bank, as soon as practicable, if there has been a failure to meet a reporting requirement. Failure or refusal to notify is an offence under the Act. - FSCODA allows APRA to give a written notice requesting explanation or information where a reporting document is incorrect, incomplete or misleading, does not comply with a reporting standard or lacks adequate information; failure to provide an adequate response can lead to a written direction to vary the document. Failure to comply with a direction constitutes a criminal offense. - APRA requires inaccurate information to be resubmitted. ### Validation, verification and supervisory use of external experts (EC9, EC10, EC11) - „Direct to APRA (D2A)‟ is the electronic data submission system for prudential returns. An officer of the bank must digitally sign, authorize and encrypt the relevant data when submitting via D2A; APRA issues „digital security certificates‟ for this purpose. - APRA uses validation rules within D2A to validate data prior to submission, preventing submission until errors are corrected. - APRA performs post-submission data quality checks; entities are expected to promptly correct (via D2A) or explain data identified by these checks. - As part of its Quarterly Risk Review (QRR) process, supervisors routinely compare information submitted from D2A to other sources for consistencies. - Prudential Standard APS 310 – Audit and Related Matters – requires appointed auditors to report to APRA annually—based on the bank‟s financial year end—on the reliability of data submitted to APRA. For certain reports the appointed auditor must provide reasonable or limited assurance that the information is reliable and in accordance with the relevant prudential standards. - APS 310 provides for the appointment of appointed auditors (invariably the statutory auditor) who will provide annually: - reasonable or limited assurance on statistical and financial data provided to APRA; - limited assurance that there are control policies and procedures in place designed to address compliance with prudential requirements and to provide reliable data to APRA; and - limited assurance that prudential and reporting standards have been complied with. - Appointed auditors may be required to prepare a special purpose engagement targeted at a particular area of prudential interest; APRA specifies the scope and form of reports for both annual and special engagements. - Section 16BA of the Banking Act requires an auditor to notify APRA immediately if it has reasonable grounds for believing that a bank is or may become insolvent; or that the interest of depositors may be or are about to be materially prejudiced. If an auditor has reasonable grounds for believing that a bank will or has failed to comply with the Banking Act, FSCODA or a prudential standard, it must write a report to APRA setting out the details of the anticipated or actual failure within 10 business days. - Annual reports by appointed auditors must be provided to APRA within three months of the annual balance date. The agreed format for routine reports intentionally highlights areas of concern and weakness and requires reporting of progress in addressing previously identified weaknesses. ### Assessment and compliance (Principle 21) - Assessment of Principle 21: Compliant. - Comment: APRA has the means to collect, review and analyze prudential reports and statistical returns on both a solo and consolidated basis. ### Accounting, disclosure and external audit (Principle 22 and EC1–EC11) - EC1: Bank management is responsible for financial record-keeping systems and reliability of data primarily under the Corporations Act 2001 and through regulation by ASIC. The Corporations Act requires proper financial records to enable preparation of true and fair financial statements. - EC2: The obligation for banks' financial accounts to be audited is set out in the Corporations Act 2001 administered by ASIC. Chapter 2M requires Australian-incorporated banks to issue financial reports to the public on an annual and half-yearly basis. The annual financial report must be audited (section 301) and the half yearly accounts must be reviewed by the external auditor. - EC3: For published financial statements, banks must adopt valuation practices consistent with Australian Accounting Standards (Australian implementation of IFRS). AASB 101 and AASB 139 provide for provisions for credit losses or changes in provisions to be charged immediately to the income statement. For prudential reporting APRA may require an additional General Reserve for Credit Losses. - EC4: Audits and external auditor engagement are based on standards issued by the Auditing and Assurance Standards Board (AUASB) which generally conform to International standards. APRA's APS 310 requires appointed auditors to provide reasonable or limited assurance on specified items and allows special purpose assignments. - EC5: Audit standards require audits to cover loan portfolio, loan loss reserves, non-performing assets, asset valuations, trading and other securities activities, derivatives, asset securitizations, and adequacy of internal controls over financial reporting. Guidance Statement GS 012 assists appointed auditors. - EC6: Section 17 of the Banking Act empowers APRA to remove a person from the position of an auditor of a bank if APRA is satisfied the person has failed to perform duties or does not meet fit and proper criteria. ASIC can apply to the Companies' Auditors and Liquidators Disciplinary Board under section 1292 of the Corporations Act to disqualify auditors. - EC7: The Corporations Act requires financial statements to be prepared in accordance with Australian Accounting Standards (based on IFRS) and audited in accordance with AUASB standards. - EC8: The Corporations Act 2001 requires banks to publish annual and half yearly accounts that comply with accounting standards; the annual accounts must be audited and half yearly accounts reviewed. - EC9: Mandatory disclosures required by Australian Accounting Standards include quantitative and qualitative information on items in financial statements or notes, Accounting Policies, capital management policies, types of capital, quantitative and qualitative disclosures for each type of risk, and related party relationships, transactions and outstanding balances. Apart from these, all banks except those established in Australia on a branch basis are required to make necessary disclosures under Pillar 3 of Basel II. - EC10: ASIC's financial reporting surveillance program reviews annual and interim financial reports of a selection of listed companies and other significant entities (which would include banks) to monitor compliance; remedial action is required when concerns arise. APRA has power under section 65 of the Banking Act to direct a bank to comply with Prudential Standard 330--Capital Adequacy: Public Disclosure of Prudential Information. - EC11: APRA publishes the accounts of individual banks on a monthly basis and aggregate data on a quarterly basis covering assets and liabilities, loans and advances, capital adequacy, financial performance and impaired asset information. The Reserve Bank of Australia provides aggregate information in its six-monthly Financial Stability review and on its website. ### Additional criteria on auditor engagement and reporting (AC1, AC2) - AC1: APS 310 provides that APRA can hold bi-lateral meetings (APRA and auditors) and tripartite meetings (APRA, bank, auditors); frequency depends on nature, size and complexity. APRA meets at least twice a year with the major auditing firms as a group to discuss emerging issues and clarify compliance and reporting obligations. - AC2: External auditors have the duty to report to the supervisor matters of material significance (e.g., failure to comply with licensing criteria or breaches of laws) and laws/regulations ensure auditors who make such reports in good faith cannot be held liable for breach of confidentiality. *Source: IMF staff summary of APRA powers and practices as presented in _cr12313.* ### Section 16BA of the Banking Act sets out the requirements for auditors to provide ### _cr12313 - Section 16BA of the Banking Act sets out the requirements for auditors to provide ### Auditor reporting requirements (Section 16BA and Section 70A) - Section 16BA requires auditors to provide information to APRA: - immediately, if the auditor has reasonable grounds for believing that, for example: - the bank is insolvent, or there is a significant risk that the bank will become insolvent; or - an existing or proposed state of affairs may prejudice materially the interests of depositors of the bank; and - as soon as is practicable, if the auditor has reasonable grounds for believing that a bank has failed to comply with a provision of: - the Banking Act or other regulatory acts, or - a Prudential Standard; or - a Direction under Division 1BA of Part II of the Banking Act (APRA‟s power to issue directions); or - a condition of its authority; and - the failure to comply is or will be significant. - Section 70A of the Banking Act requires that auditors providing information to APRA in good faith and without negligence in the performance of their duties are protected from any liability to any person. ### External auditor rotation (AC3) - Requirement summary: - Division 3 of the Corporations Act 2001 provides that an individual (but not an audit firm) who has played a significant role in the audit of a particular bank for five successive financial years is not eligible to continue to play a significant role unless the individual has not played such a role for at least two successive years. - The „5/7 rule‟ provides that an individual may not play a significant role for more than five out of seven successive financial years. ### Disclosure policy (AC4) - Requirement summary: - Banks are required to disclose information in accordance with the provisions of Pillar 3 of Basel 11. ### Access to external auditors' working papers (AC5) - Description and findings: - Under section 16B of the Banking Act, APRA may give written notice to the auditor to provide information, or to provide books, accounts or documents, about such entities to APRA if the latter considers that the provision of such information will assist it its functions under the Banking Act. ### Assessment of Principle 22 - Assessment: Compliant - Comment: Australia has a well-developed accounting and auditing regime. ### Corrective and remedial powers of supervisors (Principle 23) — overview - Principle summary: - Supervisors must have an adequate range of supervisory tools to bring about timely corrective actions, including the ability, where appropriate, to revoke the banking license or to recommend its revocation. ### EC1 — Early-stage engagement, written requirements, and follow-up - Description and findings: - The supervisor raises supervisory concerns with management or, where appropriate, the Board, at an early stage, and requires that these concerns are addressed in a timely manner. - Where the supervisor requires the bank to take significant remedial actions, these are addressed in a written document to the Board. The supervisor requires the bank to submit regular written progress reports and checks that remedial actions are completed satisfactorily. - Practice details: - A bank‟s senior management will be informed in writing when prudential concerns are identified, highlighting the areas APRA wants addressed and the timeframe for responding to the issues. - These letters include „requirements‟ for more significant issues that APRA wants addressed in a timely manner. Any letter than contains requirements is also sent to the bank‟s Board. - Bank management must respond with proposed remedial actions and timeframes. Where APRA is not satisfied with the response, it will continue to follow up with the bank, including further written responses outlining APRA‟s stance. - In situations where a bank is either unable or unwilling to address adequately APRA‟s concerns, APRA may resort to the exercise of formal powers under the Banking Act. APRA may direct the bank to undertake specific actions, including directions to: - comply with any requirement of the Banking Act and other relevant acts, - remove a director or senior manager, - remove an auditor, - not to accept further deposits or grant future loans or pay a dividend. ### EC2 — Participation in resolution of problem banks and crisis coordination - Description and findings: - The supervisor participates in deciding when and how to effect the orderly resolution of a problem bank situation (closure, restructuring, or merger). - APRA would activate its internal Financial Crisis Management Plan when: - there is a material or immediate threat to a bank‟s capital position or solvency; or - the bank‟s ability to meet its obligations to depositors as and when they fall due is subject to doubt; or - there is a risk of financial system instability arising from the financial condition of the bank in question. - Under section 10 of the APRA Act, APRA is obliged to inform the Minister if it considers that a regulated body is in financial difficulty. - APRA would consult with the Council of Financial Regulators (comprising the Ministry, Reserve Bank of Australia, APRA and ASIC) in deciding on an appropriate course of action. For systemically important banks, the Council coordinates the response with each agency performing its respective functions. - APRA has lead responsibility for resolution powers under the Banking Act, including: - giving a direction to a bank, - the appointment of a statutory manager (who would assume responsibility for running of the bank), - the application to a Court for a winding up, - the exercise of business transfer under the Financial Sector (Business Transfer and Group Restructure) Act 1991. ### EC3 — Range of supervisory tools for non-compliance or unsafe practices - Description and findings: - The supervisor has available an appropriate range of supervisory tools to address non-compliance, unsafe or unsound practices, or threats to depositors. Tools are applied in accordance with the gravity of a situation. - APRA's statutory powers include: - the appointment of a person to investigate and report on prudential matters (Section 61 of the Banking Act); - powers to issue directions as described in EC1; - power to accept an Enforceable Undertaking (written undertaking; if breached a court may make orders directing compliance, payment of compensation or other monies); - power to remove a director or senior manager; - power to remove an auditor; - power to effect a compulsory transfer of business of a bank; - power to revoke a license. ### EC4 — Broad measures and prudential objectives for severe scenarios - Description and findings: - The supervisor has a broad range of possible measures and provides clear prudential objectives or sets out actions to be taken, which may include restricting activities, withholding approval of new activities or acquisitions, restricting or suspending payments to shareholders or share repurchases, restricting asset transfers, barring individuals from banking, replacing or restricting powers of managers/Board/directors/controlling owners, facilitating takeover/merger, interim management of the bank, and revoking or recommending revocation of the banking license. - APRA's powers to issue directions, appoint a statutory manager, and effect a compulsory transfer of business cover the actions referred to in this EC. ### EC5 — Intervention for capital shortfalls and minimum capital requirements - Description and findings: - The supervisor has the power to take measures should a bank fall below the minimum capital ratio, and seeks to intervene at an early stage to prevent capital from falling below the minimum. - APRA sets out minimum capital requirements in Prudential Standard APS 110 – Capital Adequacy. - APS 110 requires the Board of a bank to ensure that the bank maintains an appropriate level and quality of capital commensurate with the level and extent of risks to which it is exposed from its activities. - This includes a requirement for the bank to have an Internal Capital Adequacy Assessment Process (ICAAP) and to maintain minimum levels of capital, at both solo and group level, as appropriate. - Minimum Prudential Capital Ratio (PCR) rule: - At a minimum APRA requires a bank to hold capital equivalent to the Prudential Capital Ratio (PCR) determined for it by APRA. - A bank‟s PCR is eight percent of risk-weighted assets unless APRA indicates that a higher percentage is required. - It is common practice for APRA to require a higher percentage where this is warranted by prudential issues (See CP6, EC1). - Under section 62A a bank must notify APRA of any breach or prospective breach of the minimum capital adequacy requirements. This notification must also outline the actions the bank is taking and/or plans to take to rectify the breach. - APRA powers to restore capital: - APRA has a number of powers to require banks to take steps to implement recovery plans or to take other measures to ensure that their capital is restored to its appropriate level. These include powers to issue directions, including directions to take specified measures to recapitalize. ### EC6 — Application of penalties and sanctions to banks and individuals - Description and findings: - The supervisor applies penalties and sanctions not only to the bank but, when and if necessary, also to management and/or the Board, or individuals therein. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12313.pdf* ### Section 11 of the Banking Act allows APRA to issue directions requiring banks to ### _cr12313 - Section 11 of the Banking Act allows APRA to issue directions requiring banks to ### Enforcement powers and legal sanctions - Section 11 of the Banking Act allows APRA to issue directions requiring banks to undertake certain actions or to refrain from taking certain actions. Non–compliance with such a direction is an offence. - An officer of a bank can be guilty of an offence if the officer fails to ensure that the bank complies with the direction. - Sections 137.1 and 137.2 of the Criminal Code Act 1995: a person is guilty of an offence punishable on conviction by imprisonment for 12 months if the person gives false or misleading information or documents to a Commonwealth entity, which includes APRA, provided that such person has been notified that provision of false or misleading information constitutes an offence. - Under the Financial Sector (Collection of Data) Act 2001, it is an offense for a bank not to provide APRA with information within a specified period or by a particular time. The principle executive officer must notify the board of the bank if the bank has failed to provide the information. A penalty applies for breaching this requirement. - Direction powers outlined (EC1) allow APRA to effectively ring-fence a bank from other group entities, including stopping payments to external parties and preventing transactions that could adversely impact the bank and its depositors. ### AC1 — Timeliness of corrective action (Additional criteria) - Finding: Relevant laws do not stipulate the time in which APRA must take action or whether it must act if a trigger is met that allows for action to be taken. - APRA's position: This omission is intended to allow necessary supervisory discretion to take corrective action as it deems appropriate. - Mitigating practice: APRA‟s supervisory regime (PAIRS, SOARS, SAPs) facilitates early identification and rectification of potential problems. ### AC2 — Ring‑fencing and limiting related‑entity risks (Additional criteria) - APRA has a consolidated supervision framework and powers to limit risk to a bank from actions of related entities. - Relevant prudential standards: - APS 110 – Capital Adequacy: requires maintenance of minimum levels of capital for a banking group commensurate with the risks assumed. - Prudential Standard APS 222 -- Associations with Related Entities: imposes limits on exposures of a bank to related counterparties; requires systems, policies and procedures to manage, monitor and control risks from associations beyond direct financial dealings (including reputational, legal and operational risks). - Direction powers permit APRA to stop payments and prevent transactions to ring-fence banks from group entities. ### AC3 — Coordination with other regulators (Additional criteria) - APRA is an integrated regulator across banking, insurance and superannuation; many coordination issues are internalized. - Where another regulator is involved, APRA would actively engage with that agency to ensure coordination. - The Council of Financial Regulators (Ministry, Reserve Bank of Australia, APRA, ASIC) provides a forum for discussion and coordination; a formal MOU exists between members detailing roles and responsibilities in crisis situations. ### Assessment — Principle 23 - Assessment: Compliant - Comment: The supervisor has sufficient corrective and remedial powers to bring about timely corrective actions. ### Principle 24 — Consolidated supervision: overview - Principle: Supervisors supervise banking groups on a consolidated basis, monitoring and applying prudential norms to all aspects of group business worldwide. ### EC1 — Familiarity with group structure and activities - APS 222 requires banks to monitor and limit risks from associations and dealings with related entities in a consolidated group; consolidation covers global operations and entities controlled by the bank or its ultimate domestic parent (paragraph 12 of APS 222). - Paragraph 8 of APS 222 requires banks to provide APRA with: - details of group members (name, place of incorporation, board composition, nature of business and other information required by APRA); - management structure of the group (including key risk management reporting lines); - intra-group support arrangements (e.g., specific guarantees); - intra-group exposures (paragraph 17); - other information as required by APRA from time to time; and - prior advice of proposed changes to composition or operations that could materially alter the group's overall risk profile. - Paragraph 9 of APS 222 requires descriptions of group risk management policies and procedures used to measure and control overall group risk (including material changes). ### EC2 — Power to review group activities, domestic and cross‑border - APRA conducts supervision at two levels – Level 1 (standalone bank) and Level 2 (consolidated banking group). Level 2 consolidation covers global operations, subsidiary entities, other controlled banking entities, securities entities and other financial entities, except for insurers (deducted from capital for capital adequacy), responsible entities related to funds management, non-financial operations and certain securitisation SPVs (Attachment C of APS 110). - APRA‟s prudential requirements apply at both Level 1 and Level 2 where relevant. - Banks must obtain APRA‟s prior approval for establishment or acquisition of a regulated presence domestically or overseas; approval is subject to APRA having access to information on overseas operations and agreement of relevant host supervisors to cooperate and share information (refer to CP25). - APRA regularly undertakes onsite inspections of material offshore operations of Australian-incorporated banks. - Sections 61 and 62 of the Banking Act 1959 provide APRA powers to obtain information from, and conduct investigations into, subsidiaries within the banking group, both in Australia and overseas. - APRA is consulting on a prudential and reporting framework for Level 3 groups (conglomerate groups with material operations in more than one APRA-regulated industry and/or one or more material unregulated entities) to apply a group-wide approach to risk and capital management. - Bank conglomerate groups must be headed by a bank or an authorised non-operating holding company (NOHC) to facilitate group supervision by APRA. ### EC3 — Supervisory framework for non‑banking activities - APRA's supervision applies to banking groups on a consolidated basis; supervisors routinely assess risk posed by non-banking activities onsite and offsite. - Factors APRA considers when assessing risk from non-banking activities: - the financial strength of the group; - the nature of business conducted in group entities; - the quality of management and systems, particularly risk management across the group; - the level of financial and operational interdependence across the group, particularly between regulated and unregulated entities; - whether other members of the group are regulated entities and the quality of that regulation; - other relevant factors on a case-by-case basis. - Under paragraph 18 of APS 222, if APRA is not satisfied with a bank's systems and controls for exposures to related entities, it may require additional internal controls, more robust reporting mechanisms and/or a higher prudential capital ratio. ### EC4 — Power to impose consolidated prudential standards and collect consolidated information - Under section 11AF of the Banking Act, APRA may make prudential standards apply to banks, authorized NOHCs and their subsidiaries. - APRA‟s prudential and reporting standards apply on a standalone and consolidated basis, covering capital adequacy, credit quality, large exposures and exposures to related parties. ### EC5 — Arrangements with other supervisors for information exchange - APRA has working relationships and MOUs with relevant domestic and foreign regulators (example: Reserve Bank of New Zealand and the UK Financial Services Authority) to exchange information and investigative assistance. - APRA conducts onsite prudential inspections of banks' foreign operations where material. - APRA participates in supervisory colleges and crisis management groups hosted by foreign banks with significant Australian operations and has hosted supervisory colleges in Australia. ### EC6 — Power to limit activities and locations of the consolidated group - Paragraph 8 of APS 222 requires banks to advise APRA in advance of material changes and obtain APRA‟s prior approval for establishment or acquisition of regulated presences domestically or overseas. - If APRA sees excessive risks or impediments to consolidated supervision, it can use Banking Act powers to prohibit a bank from undertaking activities. ### EC7 — Assurance over management oversight of foreign operations - APRA's onsite prudential inspections examine group-wide activities and the ability of Board and head office management to oversee and control regional operations. - APRA conducts onsite inspections of foreign operations considered material (e.g., New Zealand). ### EC8 — Adequacy of information reporting and internal control assessments for foreign operations - Onsite inspections request Board/management reports, relevant risk management policies, internal audit reports and reporting lines to head office as part of pre-inspection information requests. - Offsite review plus onsite interactions enable APRA to determine whether information received by parent/head office on foreign operations is sufficient in scope and frequency. - APRA reviews compliance with internal controls onsite and assesses head office oversight effectiveness; APRA also discusses assessments with host supervisors. ### EC9 — Power to close or limit foreign offices - APRA has broad powers under the Banking Act (Division 1 BA) to issue directions to banks, including directing divestment of businesses or branch offices, or placing limits on business activities when necessary for compliance with prudential standards. ### EC10 — Close oversight where foreign activities are higher risk or under different regimes - Paragraph 7 of APS 220 requires the Board to ensure detailed policies and procedures to measure, manage, monitor and report all risk at a group level, including foreign operations. - APRA expects intensity of management oversight to be commensurate with the risk profile of operations and closer oversight when foreign activities have higher risk profiles or operate under fundamentally different supervisory regimes. - Where APRA is not satisfied with adequacy of management oversight of foreign operations, it may require additional internal controls, more robust reporting mechanisms and/or a higher prudential ratio. ### Additional criteria (AC) — Corporate ownership, host supervision, and onsite reviews - AC1 (corporate ownership): Corporate ownership of banks is permitted in Australia. Currently, there are no banks in conglomerate groups with substantial non-financial companies in the group. Banking groups must be headed by a bank or an authorized NOHC; the bank has the power to establish and enforce fit and proper standards for owners and senior management of parent companies. - AC2 (home supervisor assesses host supervision): APRA's supervisory approach involves regular liaison with host supervisors in countries where Australian banks have material operations; currently significant operations are in New Zealand and the UK, with close working relationships with supervisors in those jurisdictions. - AC3 (periodic review of foreign locations): Frequency of onsite inspections of offshore operations is determined by APRA's assessment of materiality and risk profile. For material or high-risk operations, APRA increases frequency and intensity of onsite inspections and reporting regardless of location. APRA typically liaises with host-country supervisors during reviews. ### Assessment — Principle 24 - Assessment: Largely compliant - Comment: - APRA meets requirements for effective consolidated supervision in overseeing group risk management structures, being informed of breaches of prudential standards on a group-wide basis, calculating necessary ratios on a solo and consolidated basis, etc. - Recommendation: APRA should consider extending its onsite inspection of banking groups as a matter of course to cover risks unique to non-banking activities (often carried out by subsidiaries), e.g., funds management. APRA has the right to inspect these activities and will do so if issues arise, but does not do so routinely. - Rationale: Such non-banking activities can involve unique risks (e.g., valuation of assets and pricing of units). These activities are generally only carried out by very large banks and constitute a small part of group business, but problems could go undetected without routine onsite inspections and could lead to contagion or reputational risk. It is recommended that APRA‟s onsite inspection regime be extended to cover these activities. ### Principle 25 — Home‑host relationships (intro) - Principle: Cross-border consolidated supervision requires cooperation and information exchange between home supervisors and host banking supervisors. Local operations of foreign banks must be conducted to the same standards required of domestic institutions. ### EC1 — Information exchange adequacy (start) - (Content provided up to the heading only in source.) *Source: IMF staff report content provided in the supplied PDF excerpt.* ### Section 56 of the APRA Act provides for the exchange of information with other ### _cr12313 - Section 56 of the APRA Act provides for the exchange of information with other ### Legal and policy framework - Section 56 of the APRA Act provides for the exchange of information with other supervisors subject to protection of confidential information provisions. - APRA's policy is to establish formal cooperation arrangements, mostly in the form of MOU‟s, with jurisdictions which have banking connections with Australia, either Australian banks having a presence in those other jurisdictions or foreign banks having a presence in Australia. - Where formal cooperation arrangements are agreed, their existence should be communicated to the banks and banking groups affected. - Assessment of Principle 25: Compliant. ### Mechanisms for information exchange and cooperation - Face-to-face meetings, teleconferencing and participation in supervisory colleges are used to foster effective exchange of information. - A Trans-Tasman Council on Banking Supervision was established in 2005 to enhance information sharing and promote a coordinated response to financial crises between Australia and New Zealand. - Special arrangements with the UK FSA include quarterly telephone conferences, periodic interactions on operational issues, possible joint bank inspections and participation in relevant supervisory colleges. - Frequency of interaction between Australian and overseas regulators increased during the global financial crisis. - APRA organizes conference calls with all relevant host supervisors at least annually but more typically every three to six months. - APRA will provide host supervisors of subsidiaries incorporated in overseas jurisdictions with its assessment of the parent, if requested. - APRA invites a representative from the host supervisor to accompany APRA when undertaking an inspection of Australian banks operating in the host supervisor‟s jurisdiction. - Where a supervisory action is based on information received from another supervisor, APRA will generally consult with the relevant supervisor prior to taking action; where prior consultation may not be appropriate, APRA will inform the relevant supervisor after the event. ### Findings and descriptions by ECM/EC criteria - EC2 (Information sharing arrangements) - APRA‟s policy is to establish MOU‟s, or equivalent, with all prudential agencies where material cross-border operations exist. - APRA has established formal cooperation arrangements, mostly in the form of MOU‟s, with 22 overseas financial regulators. - These formal cooperation arrangements cover sharing of confidential information, on-going supervision, and other issues such as policy development. - All banks/banking groups are made aware of the existence of formal cooperation arrangements and, in general, MOUs are published on the APRA Website. - EC3 (Home supervisor provides information to host supervisors) - Home supervisor should provide timely information concerning: - the overall framework of supervision in which the banking group operates; - the bank or banking group, to allow a proper perspective of the activities conducted within the host country‟s borders; - the specific operations in the host country; and - where possible and appropriate, significant problems arising in the head office or other parts of the banking group if these are likely to have a material effect on the safety and soundness of subsidiaries or branches in host countries. - APRA‟s overall approach to supervision is documented on its Website. - For host supervisors visiting Australia, APRA presentations detail its supervisory approach, including its risk based approach and off and on-site supervisory regimes. - Where supervisory colleges exist, a summary of recent prudential findings is included in agendas. - EC4 (Host supervisor provides information to home supervisors) - Host supervisor should provide timely information concerning: - material or persistent non-compliance with relevant supervisory requirements, such as capital ratios or operational limits, specifically applied to a bank‟s operations in the host country; - adverse or potentially adverse developments in the local operations of a bank or banking group regulated by the home supervisor; - adverse assessments of such qualitative aspects of a bank‟s operations as risk management and controls at the offices in the host country; and - any material remedial action it takes regarding the operations of a bank regulated by the home supervisor. - Where APRA is the host supervisor, it advises the home supervisor of any material issues in its dealings with the local operations of a foreign bank and, upon request, shares its assessment of risk management systems, including the basis to set the prudential capital ratio for a foreign bank subsidiary. - Examples of APRA engagement with home supervisors include: - raising its perception of undue concentration risk on the books of a foreign bank branch operating in Australia when viewed on a standalone basis; and - sharing its intention not to accredit the local operations of a foreign bank for the advanced methodologies for the calculation of regulatory capital adequacy notwithstanding the home‟s supervisors accreditation of the bank under the Basel II framework on a global basis. - EC5 (Parity of prudential, inspection and reporting requirements) - Foreign banks wishing to undertake banking business in Australia must be authorized by APRA, subject to meeting the requisite authorization requirements. - Foreign banks can establish as an incorporated subsidiary in Australia or on a branch basis. - A foreign bank subsidiary is subject to the same regulatory, supervisory and reporting regime as Australian-owned banks. - Foreign bank branches are not subject to certain prudential requirements, e.g., capital adequacy requirements, but are subject to the same supervisory approach as locally incorporated banks, e.g., off and on-site supervision. - Foreign bank branches are rated under APRA‟s risk rating regime (PAIRS and SOARS). - Foreign bank branches in Australia are prohibited from taking retail deposits (defined as an initial deposit amount of less than A$250,000). - Two current exemptions allow foreign banks to conduct business in Australia without being authorized and therefore subject to APRA‟s prudential regime: - a foreign bank can raise funds in Australian wholesale capital markets by issuing securities subject to certain conditions (see EC3 of CP2) and under the terms of the Corporations Act which is administered by ASIC. - a foreign bank can operate as a “registered entity” and take money on deposit subject to certain conditions (see EC4 of CP2). - EC6 (Home supervisor non-objection and consolidated supervision) - APRA will not issue an authorization to a foreign bank without consent from the bank‟s home supervisor. - Under APRA‟s Authorization Guidelines, a statement must be issued by the applicant‟s parent‟s home supervisor consenting to the application to establish a banking presence in Australia. - The statement must confirm that the home supervisor supervises the parent bank and its subsidiaries on a consolidated basis in accordance with the principles set out in the Basel Concordat and that the home supervisor is willing to co-operate in the supervision of the proposed subsidiary in terms of the Concordat. - In periodic contacts with the home supervisor, APRA confirms that the latter continues to apply global consolidated supervision. - EC7 (On-site access for home supervisors) - APRA pursues a program of onsite prudential inspections of the overseas operations of Australian banks based on its assessment of risks, controls, etc. - Over the three year period 2008/2011, an average of 10 inspections of foreign operations of Australian banks was undertaken per year. - APRA informs the host supervisor of the intended review and ensures that host authority staff have the opportunity to accompany the inspection team and/or to take part in subsequent debriefing discussions. - EC8 (Supervision of shell banks and booking offices) - Australia does not allow shell companies or booking offices to operate in Australia. - EC9 (Consultation before consequential action) - Where a supervisory action is based on information received from another supervisor, APRA will generally consult with the relevant supervisor prior to taking action; where prior consultation may not be appropriate, APRA will inform the relevant supervisor after the event. ### Additional criteria (AC1) - AC1 (Communication strategy) - Where necessary, the home supervisor develops an agreed communication strategy with the relevant host supervisors reflecting the size and complexity of cross-border operations. - APRA‟s approach: all communications with relevant overseas supervisors will be timely and relevant to that supervisor, with particular attention to the New Zealand authorities given interdependence between the banking regimes. ### Key statistics and exact figures - APRA has formal cooperation arrangements (mostly MOUs) with 22 overseas financial regulators. - Trans-Tasman Council on Banking Supervision established in 2005. - APRA organizes conference calls at least annually but more typically every three to six months. - Foreign bank branches in Australia are prohibited from taking retail deposits defined as an initial deposit amount of less than A$250,000. - Over the three year period 2008/2011, an average of 10 inspections of foreign operations of Australian banks was undertaken per year. *Source: _cr12313 - Section 56 of the APRA Act provides for the exchange of information with other* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12313.pdf_