Lecture 4 Flashcards
Ensure a regulatory framework that is able to adjust regulation to maintain the ______ of the financial system in a dynmaic environment.
Ensure a regulatory framework that is able to adjust regulation to maintain the cost-effectiveness of the financial system in a dynamic environment.
Provide a focused and accountable structure that facilitates ____ for ___ and ___.
Provide a focused and accountable structure that facilitates expectations for consumer protection and financial safety.
Provide ___ and_____regulation of financial conglomerates.
Provide efficient and effective regulation of financial conglomerates.
Establish ___ ____ and ___ ____ across the financial system.
Establish consistent regulation and competitive neutrality across the financial system.
Contribute effective monitoring and ___with the ____ of establishing more _____ ____ and ____ ____.
Contribute effective monitoring and review with the aim of establishing more contestable efficient and fair markets.
Basic principle of APRA’s approach to bank supervision is;
Basic principle of APRA’s approach to bank supervision is that the primary responsibility for a banks sound operations rests with the bank’s own management and board of directors.
In addition to the ____ and _____of prudential statements and guidance notes, APRA is responsible for continuous supervision of regulated institutions.
In addition to the formulation and implementation of prudential statements and guidance notes, APRA is responsible for continuous supervision of regulated institutions.
APRA has two risk assessment and response tools
Probability and Impact Rating System (PAIRS) & Supervisory Oversight and Response System (SOARS)
(PAIRS) used to;1. 2.
1.assess the probability that a regulated institution will fail 2.measure the impact (consequences) of that failure.
PAIRS based on:
- Strength of management, 2. Controls, 3. Capital Base
Supervisory Oversight and Response System (SOARS);
used to determine how supervisory concerns based on PAIRS risk assessments should be acted upon by APRA
Pairs probability:
Pairs probability rating is a measure of the likelihood that an institution will fail
PAIRS assessment involves consideration of four key factors:
Inherent Risk, Management and Control, Net Risk, Capital Support
PAIRS assessment involves consideration of four key factors:
Inherent Risk, Management and Control, Net Risk, Capital Support
Inherent risk is:
uncertainty in relation to business operations of an entity, whether statistically quantifiable or not, that has the potential to affect the financial position of an entity (primarily determined by the types of products and services offered by an entity)
Probability Rating:
Low, Lower Medium, Upper Medium, High, Extreme
Typical supervision activates for entities Normal include: 1.
•More frequent and/or more targeted prudential reviews by the supervision and risk/technical specialist teams;
Typical supervision for entities Normal include 2.:
-More frequent and more detailed collection and analysis of data and reports;
Typical supervision for entities Normal include 3.
• Communication with auditors and actuaries;
Typical supervision for entities Normal include 4-7.
• Special investigations by external expects e.g. auditors, actuaries, etc. • Requests for revised business plans; • Assessing the rectification plans put in place by the entity; • Expressing concerns to the responsible persons of the entity;
APRA intervenes actively for entities in Mandated Improvement. Typical supervision activities include:
•Requiring rectification plans and monitoring milestones; •Requiring revised business plans; •Increasing capital requirements; •Issuing directions; •Accepting enforceable undertaking •Engaging external resources •Consideration of fitness and propriety issues.
Normal: Typical supervision activates include:
•Prudential reviews •Analysis of data received on a monthly, quarterly and/or annual basis •Other supervision activities as required or at the discretion of the responsible supervision team.
For entities in Oversight:
•More frequent and/or more targeted prudential reviews •More frequent and more detailed collection and analysis of data and reports; •Communication with auditors and actuaries; •Special investigations by external expects •Requests for revised business plans •Assessing the rectification plans put in place by the entity •Expressing concerns to the responsible persons of the entity
Mandated Improvement; active activities include:
•Requiring rectification plans and monitoring milestones; •Requiring revised business plans; •Increasing capital requirements; •Issuing directions; •Accepting enforceable undertaking, often to exit the business by finding a new and sounder owner. •Engaging external resources, such as specialist investigator, actuary etc to report of APRA •Consideration of fitness and propriety issues.
Restructure: APRA enforcement powers to:
• Withdraw licenses • Replace persons/service lines • Merge entities • Run-off existing business • Restrict business activities • Quarantine assets • Appoint an inspector, judicial manager or provisional liquidator • Issue directions or sanctions • Place the company into receivership/liquidation
PRUDENTIAL & REGULATORY CONTROLS PLACED ON ADIs: Authority ownership ; Control:
- Approval must be obtained from APRA before conducting banking business. - Restriction in the use of terms such as ‘bank’, ‘building society’ and ‘credit union’. -Limits on number of board members associated with a specific shareholders or shareholder group. -limited to 15% by an individual or entity (Financial Sector (Shareholdings)Act 1998); - >15% requires approval of Fed Treasurer -Merger takeover of >15% requires approval from Treasurer& ACCC -‘4 Pillars’ Policy – The big four banks can’t merge
Board Certification: What are the ADIs required to present to APRA?
certification by management of the efficacy of the institution’s risk management systems.
Board Certification: In reporting to APRA what two things do they certify?
Exposure Limits & Liquidity management
Board Certification: what are exposures are the board expected to report under Exposure Limits?
• Exposure Limits (APS 221)
– Reporting and policy requirements regarding exposure
limits are also placed on ADIs
• Specifically, ADIs must report new exposures greater than or
equal to 10% of the regulatory capital
• ADI must consult APRA prior to committing to any proposed
exposures to non-govt, non-ADI counterparties in excess of
10% of its regulatory capital (upper limit set at 25% of
regulatory capital)
Board Certification- what is the board attesting to APRA?
ADIs (the Board and CEO) are required to present a
certification by management of the efficacy of the
institution’s risk management systems (within 3 months of
annual balance date)
The External Reviews are?
3 mechanisms used by APRA monitoring FIS
What 4 reports are contained in the Quarterly Stats data provided by banks?
Foreign currency exposure Off-balance sheet exposure Impaired assets –used as collateral (houses) Asset portfolio by credit risk grading –sector of investment rating these.
What 4 reports are contained in the Quarterly Stats data provided by banks?
Foreign currency exposure Off-balance sheet exposure Impaired assets –used as collateral (houses) Asset portfolio by credit risk grading –sector of investment rating these.
External review are 3 mechanisms used by APRA to monitor FIs, what are these 3 mechanisms?
- Quarterly Stats provided by the bank 2.Face-to-Face contact 3.External auditor required to report to APRA
What is the face-to-face requirement part of board certification?
Meeting with senior management regularly
In Board Certification what is the mechanism of external auditor?
–Whether bank is observing prudential standards –Whether stats are reliable –Whether statutory & regulatory requirements are being met or not – Including money laundering requirement – Matters which may adversely impact on depositors
Annual meeting for external auditor of FIs?
oAnnual meeting between banks, its auditors and APRA oAnnual meeting between APRA & external auditors.
What is capital adequacy?
The maintenance of adequate levels of capital relates directly to protecting depositors.
What is capital adequacy?
The maintenance of adequate levels of capital relates directly to protecting depositors.
Importance of capital management is articulated in APS110 Capital Adequacy;
“Capital is the cornerstone of ADIs strength… buffer to absorb unanticipated losses from its activites….in event of problems ADI continue to operate in sound and viable manner”
The major functions of capital;
-To absorb unanticipated losses -To protect uninsured depositors, bondholders and creditors in case of insolvency and liquidation -To protect FI insurance funds and the taxpayer -To protect the FI owners against increases in insurance premiums and lowering the cost of funds -To partially fund the FI’s investment activities
Sufficient capital levels…
-inspire confidence in the FI -enable the FI to continue even in difficult times. inspire confidence in the FI
FIs capital guided by two key factors;
Regulated capital adequacy requirements The risk-return trade-offs available from the use of leverage
Measures of capital adequacy
Leverage ratio Risk-based capital ratio
Prior to APS 110, initial measure of capital adequacy was?
Equity- total assets ratio >6%
Prior to APS 110, initial measure of capital adequacy had Several Flaws?
Definition excluded use of non-equity capital. Lack of recognition of different risk level institutions Bank subsidiaries outside requirements Did not account for off-balance sheet exposures (guarantees, warranties, underwriting commitments).
Common Equity Tier 1 >
4.5%
Common Equity Tier 1 Capital >
4.5%
Common Equity Tier 1 Capital comprises of;
