Tag: APRA

APRA Strengthens Rules to Combat Contagion Risk Within Banking Groups (Eventually)

The Australian Prudential Regulation Authority (APRA) has released a strengthened prudential standard aimed at mitigating contagion risk within banking groups. The new rules will come in from 1 January 2021. Until then the 100 or so such operations within a small number of ADIs will remain obscured, with potential higher risks exposure in a down turn.

Such complex group structures could potentially make it difficult for APRA to resolve an ADI quickly and protect depositors’ savings in the unlikely event of a bank failure. 

The updated Prudential Standard APS 222 Associations with Related Entities (APS 222) will further reduce the risk of problems in one part of a corporate group having a detrimental impact on an authorised deposit-taking institution (ADI).

Deputy Chair John Lonsdale said APRA began consulting last July on proposed changes to APS 222 to incorporate some of the lessons learned from the global financial crisis.

“Concessions in the existing framework led to some ADIs establishing operations in foreign jurisdictions, which are managed and funded within the domestic bank.

“APRA has only limited visibility of these operations, which also fall outside the purview of foreign regulators. They complicate operating structures and there is no certainty their assets would be available to an ADI if it were to enter resolution. There are currently around 100 such operations within a small number of ADIs.

“Additionally, if an ADI were to fully utilise some of the limits within the existing framework, they would be exposed to excessive levels of contagion risk,” Mr Lonsdale said.

APRA received submissions from 10 stakeholders to its consultation; most supported updating the requirements, however some raised concerns about the complexity of implementing certain proposed changes.

Responding to the consultation, APRA confirmed that APS 222 will be updated to include:

  • a broader definition of related entities that includes board directors and substantial shareholders;
  • revised limits on the extent to which ADIs can be exposed to related entities;
  • minimum requirements for ADIs to assess contagion risk; and
  • removing the eligibility of ADIs’ overseas subsidiaries to be regulated under APRA’s Extended Licensed Entity framework.

Additionally, APRA will require ADIs to regularly assess and report on their exposure to step-in risk – the likelihood that they may need to “step in” to support an entity to which they are not directly related.

Mr Lonsdale said the stronger APS 222 will enhance the prudential safety of ADIs and reinforce financial system stability.

“As we saw during the global financial crisis, deficiencies in governance or internal controls in one part of a corporate group can quickly spread and cause financial or reputational damage to an ADI. Furthermore, complex group structures could potentially make it difficult for APRA to resolve an ADI quickly and protect depositors’ savings in the unlikely event of a bank failure. 

“By updating and strengthening the requirements of APS 222, APRA will ensure ADIs are better able to monitor, manage and control contagion risk within their organisations.

“While aspects of the revised standard will have a material impact on some ADIs, we have adjusted our original proposals in some areas to make the requirements less burdensome. We are open to considering appropriate transition arrangements on a case-by-case basis where specific entities request it,” Mr Lonsdale said.

The new APS 222 will come into effect from 1 January 2021.

APRA fines Westpac for failing to meet legal reporting requirements

The Australian Prudential Regulation Authority (APRA) has served infringement notices on Westpac Banking Corporation (Westpac) and two of its subsidiaries for failing to meet their legal obligations to report data to APRA.

Westpac, along with two of its registered financial corporations (RFCs), St George Finance Holdings Limited and Capital Finance Australia Limited, breached the requirements of the Financial Sector (Collection of Data) Act 2001 (FSCODA) by failing to report data by the required deadlines. Westpac was up to 20 days late in filing its reports for the month ending 31 March 2019 under the Economic and Financial Statistics program, which were due on 1 May. The two RFCs missed the same deadline by up to 37 days.

The RFCs were also up to 28 days late in submitting their reports for the month ending 30 April 2019. Additionally, all three Westpac entities were between 9 and 28 days late in filing their reports for the quarter ending 31 March 2019, which were due on 10 May 2019. 

Failure to submit monthly or quarterly returns within the timeframes specified by APRA’s reporting standards is a strict liability offence.

APRA sent show cause notices to the Westpac entities on 22 July seeking their responses to APRA’s intention to serve them with infringement notices over the FSCODA breaches. After assessing Westpac’s responses, APRA has decided to proceed with the issuing of infringement notices.

Under the terms of the infringement notices, APRA requires the Westpac entities to pay a cumulative penalty of $1,501,500. This is the maximum financial penalty APRA can issue for infringement notices under FSCODA.

APRA Deputy Chair John Lonsdale said APRA’s reporting standards were legally binding in the same way as its prudential standards.

“Access to accurate and timely data is critical for APRA to monitor effectively the safety and stability of the banking, insurance and superannuation sectors.”

“By issuing these infringement notices, APRA wants to send a strong message to industry that compliance with our reporting standards is mandatory, and cannot be considered secondary to other business priorities,” Mr Lonsdale said.

The Westpac entities have until 6 September to pay the fines imposed by the infringement notices

Macquarie Bank, Rabobank Australia and HSBC Intra-Group Funding Warning From APRA

The Australian Prudential Regulation Authority (APRA) has required several banks to tighten the intra-group funding arrangements for their Australian operations.  

Following a review of funding agreements across the authorised deposit-taking (ADI) industry, APRA has notified Macquarie Bank Limited, Rabobank Australia Limited and HSBC Bank Australia Limited that the reporting of their intra-group funding as stable has been in breach of the prudential liquidity standard. 

APRA’s review found these banks were improperly reporting the stability of the funding they received from other entities within the group. These banks had provisions in their funding agreements that would potentially allow the group funding to be withdrawn in a stress scenario, undermining the stability of the Australian bank.

APRA is requiring these banks to strengthen intra-group agreements to ensure term funding cannot be withdrawn in a financial stress scenario. APRA is also requiring these banks to restate their past funding and liquidity ratios where these had been reported incorrectly, to provide transparency to investors and the broader community. Supervisors are considering a range of further options, including the imposition of higher funding and liquidity requirements on these ADIs.

APRA Deputy Chair John Lonsdale said: “Macquarie Bank, Rabobank Australia and HSBC Australia are financially sound, with strong liquidity and funding positions in the current stable environment. However, to ensure they would be able to withstand a scenario of financial stress, group funding agreements for Australian banks must be watertight, so they can be relied on when they would be most needed.” 

To assist ADIs in complying with the prudential regulations, APRA has published a new frequently asked question (question 17), available on the following page: Liquidity – frequently asked questions

17. How should clauses which accelerate the repayment of funds owing under funding programs or agreements (such as in the event of a material adverse change) affect the treatment of the funding under APS 210 Attachment A paragraph 45 and APS 210 Attachment C paragraph 8?

APRA expects that a clause which allows a lender (or depositor) to accelerate repayment if the ADI is under financial stress but is still solvent and meeting its financial obligations under the program/agreement will be included in the LCR as funding that has its earliest possible contractual maturity date within the LCR horizon of 30 days. A run-off rate according to the requirements of APS 210 Attachment A paragraph 53 must then be applied. Similarly, APRA expects for NSFR purposes that the ADI will assume a residual maturity of less than six months, being the earliest date at which the funds under the funding agreement containing the relevant acceleration clause may be redeemed, and assign an ASF factor in accordance with the requirements of APS 210 Attachment C paragraph 15.    The clauses that were of concern allow the lender (or depositor) to accelerate maturity, making funds owed under the funding agreement immediately due and payable (regardless of the maturity date) upon the borrowing ADI hitting a particular trigger or coming under (or potentially coming under) stress. Such clauses could allow the lender (or depositor) to withdraw funds when they are most needed by the borrowing ADI. Further, the funds might be withdrawn in priority to other creditors, including retail depositors. Examples of such clauses include, but are not limited to: 

  • any material adverse change of the borrowing ADI which could affect the ability of the borrowing ADI to satisfy its obligations; 
  • meeting a specified market-based or similar trigger (for example, hitting a credit default swap spread or equity price), regardless of the likelihood of meeting that trigger;
  • any representation or warranty made at issuance later becomes untrue or misleading either when made or repeated; 
  • a downgrade in excess of 3 notches in the borrowing ADI’s long-term credit rating; and 
  • any litigation or governmental investigation or proceeding pending or threatened against the borrowing ADI.

APRA appreciates the difficulty of precisely prescribing whether a clause will result in the funding being included within the 30-day horizon of the LCR. APRA expects ADIs to apply a robust process of challenge to such a determination. However, at a high level, a clause that potentially triggers early repayment where the ADI is still meeting its financial obligations under the facility, has not failed and continues to operate as an ADI should warrant careful scrutiny. If the ADI remains in doubt, it should send a query to APRA rather than risk a potential breach of the requirements in APS 210.    In addition to consideration of the appropriate LCR and NSFR requirements in APS 210, if an ADI has a term or condition in a funding agreement with a related entity which is not typically contained in its external funding programs and agreements, the ADI should also consider the requirements of APS 222 paragraph 9.

APRA Proposes New Remuneration Standards

APRA) has released a draft prudential standard aimed at clarifying and strengthening remuneration requirements in APRA-regulated entities.

This is in response to the fact that in the financial sector, APRA has observed an over-emphasis on short-term financial performance and a lack of accountability when failures occur, especially among senior management. 

In a discussion paper released today for consultation, APRA has proposed creating a new prudential standard to better align remuneration frameworks with the long-term interests of entities and their stakeholders, including customers and shareholders.

Draft prudential standard CPS 511 Remuneration introduces heightened requirements on entities’ remuneration and accountability arrangements in response to evidence that existing arrangements have been a factor driving poor consumer outcomes.

The proposed reforms address recommendations 5.1 to 5.3 from the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, which were endorsed by the Government in February. 

The package of measures is materially more prescriptive than APRA’s existing remuneration requirements and will place Australia in line with better international remuneration practice.  


Among the key reforms, APRA is proposing: 

  • To elevate the importance of managing non-financial risks, financial performance measures must not comprise more than 50 per cent of performance criteria for variable remuneration outcomes; 
  • Minimum deferral periods for variable remuneration of up to seven years will be introduced for senior executives in larger, more complex entities. Boards will also have scope to recover remuneration for up to four years after it has vested; and
  • Boards must approve and actively oversee remuneration policies for all employees, and regularly confirm they are being applied in practice to ensure individual and collective accountability.

APRA flagged its intention to strengthen prudential requirements on remuneration in April last year following its Review of Remuneration Practices at Large Financial Institutions. The need for a strengthened approach was further underlined by the findings of last year’s Prudential Inquiry into the Commonwealth Bank of Australia, as well as the recent industry self-assessments examining issues on governance, accountability and culture.

APRA Deputy Chair John Lonsdale said it was clear that existing remuneration arrangements in many entities were not incentivising the right behaviours.

“Remuneration and accountability frameworks play an important role in driving employee behaviour. Where policies are poorly designed, or not followed in practice, companies may incentivise conduct that is contrary to the long-term interests of the company and its customers. 

“In the financial sector, APRA has observed an over-emphasis on short-term financial performance and a lack of accountability when failures occur, especially among senior management. 

“This has contributed to a series of damaging incidents that have undermined trust in both individual institutions and the financial industry more broadly. Crucially from APRA’s perspective, these incidents have damaged not only institutions’ reputations, but also their financial positions,” Mr Lonsdale said.

Mr Lonsdale said CPS 511 would complement the Banking Executive Accountability Regime to lift industry standards of accountability and reduce the likelihood of misconduct.

“Limiting the influence of financial performance metrics in determining variable remuneration will encourage executives to put greater focus on non-financial risks, such as culture and governance. As our recent response to the industry self-assessments made clear, this remains a weak spot in many financial institutions.

“Introducing the minimum holding periods for variable remuneration ensures executives have ‘skin in the game’ for longer, and allows boards to adjust remuneration downwards if problems emerge over an extended horizon.

“APRA will not be determining how much employees get paid. Rather, we want to empower boards to more effectively incentivise behaviour that supports the long-term interests of their entities. By reducing the risk of misconduct, we hope to see better outcomes for customers and higher returns for shareholders in the long-term.

“We recognise that some aspects of this proposal are far-reaching and will require major changes to industry practices. APRA will listen closely to feedback from impacted stakeholders to determine if our proposed approach is correctly calibrated to achieve its intended outcomes,” he said.

A three month consultation period will close on 22 October. APRA intends to release the final prudential standard before the end of 2019, with a view to it taking effect in 2021 following appropriate transitional arrangements.
Copies of the discussion paper and the draft Prudential Standard CPS 511 Remuneration are available on the APRA website at: Consultation on remuneration requirements for all APRA-regulated entities.

APRA applies additional capital requirements to ANZ, NAB and Westpac

The Australian Prudential Regulation Authority (APRA) is applying additional capital requirements to three major banks to reflect higher operational risk identified in their risk governance self-assessments.

APRA has written to ANZ, National Australia Bank (NAB) and Westpac advising of an increase in their minimum capital requirements of $500 million each. The capital add-ons will apply until the banks have completed their planned remediation to strengthen risk management, and closed gaps identified in their self-assessments.

The increase in capital requirements follows APRA’s decision in May last year to apply a $1 billion dollar capital add-on to Commonwealth Bank of Australia (CBA) in response to the findings of the APRA-initiated Prudential Inquiry into CBA.

Following the CBA Inquiry’s Final Report, APRA wrote to the boards of 36 of the country’s largest banks, insurers and superannuation licensees asking them to gauge whether the weaknesses uncovered by the Inquiry also existed in their own companies. Although the self-assessments raised no concerns about financial soundness, they confirmed that many of the issues identified in the Inquiry were not unique to CBA. This included the need to strengthen non-financial risk management, ensure accountabilities are clear, cascaded and enforced, address long-standing weaknesses and enhance risk culture.

APRA Chair Wayne Byres said: “Australia’s major banks are well-capitalised and financially sound, but improvements in the management of non-financial risks are needed. This will require a real focus on the root causes of the issues that have been identified, including complexity, unclear accountabilities, weak incentives and cultures that have been too accepting of long-standing gaps.

“The major banks play a vital role in the stability of the entire financial system, and APRA expects them to hold themselves to the highest standards of risk governance. Their self-assessments reveal that they have fallen short in a number of areas, and APRA is therefore raising their regulatory capital requirements until weaknesses have been fully remediated,” Mr Byres said.

APRA supervisors continue to provide tailored feedback to other banks, insurers and superannuation licensees that provided self-assessments to APRA. Where weaknesses have been identified, the level of supervisory scrutiny is being increased as remediation actions are implemented. Where material weaknesses exist, APRA is also considering the need for the application of an additional operational risk capital requirement.

The Council Of Financial Regulators Speaks

The Council just updated their charter, and published their latest minutes. At least there is some minimal disclosure now, though high-level. Note the fact that Treasury is one of the members, alongside the RBA, ASIC and APRA.

The Council of Financial Regulators (the Council) is the coordinating body for Australia’s main financial regulatory agencies. There are four members: the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), the Australian Treasury and the Reserve Bank of Australia (RBA). The Reserve Bank Governor chairs the Council and the RBA provides secretariat support. It is a non-statutory body, without regulatory or policy decision-making powers. Those powers reside with its members. The Council’s objectives are to promote stability of the Australian financial system and support effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the Council recognises the benefits of a competitive, efficient and fair financial system. The Council operates as a forum for cooperation and coordination among member agencies. It meets each quarter, or more often if required.

The updates charter says:

The Council of Financial Regulators (CFR) comprises APRA, ASIC, the RBA and Treasury. It aims to facilitate cooperation and collaboration between member agencies, with the ultimate objectives of promoting stability of the Australian financial system and supporting effective and efficient regulation by Australia’s financial regulatory agencies. In doing so, the CFR recognises the benefits of a competitive, efficient and fair financial system.

The CFR provides a forum for:

  • identifying important issues and trends in the financial system, with a focus on those that may impinge upon overall financial stability;
  • exchanging information and views on financial regulation and assisting with coordination where members’ responsibilities overlap;
  • harmonising regulatory and reporting requirements, paying close attention to regulatory costs;
  • ensuring appropriate coordination among the agencies in planning for and responding to instances of financial instability; and
  • coordinating engagement with the work of international institutions, forums and regulators as it relates to financial system stability.

The CFR will draw on the expertise of other non-member government agencies where appropriate for its agenda, and will meet jointly with the ACCC, AUSTRAC and the ATO at least annually to discuss broader financial sector policy.

Their latest minutes:

At its meeting on 5 July 2019, the Council of Financial Regulators (the Council) discussed systemic risks facing the Australian financial system, regulatory issues and developments relevant to its members. The main topics discussed included the following:

  • Financing conditions and the housing market. The Council discussed credit conditions and ongoing adjustment in the housing market. Housing credit growth has stabilised at a relatively low level, with lending to investors remaining weak, particularly from the major banks. Demand for housing credit has been subdued, though there has also been some tightening in credit supply. Business credit growth has weakened recently, with lending to small businesses declining over the past year. Lenders are themselves applying stricter verification of expenses and income to small businesses, and lending may be affected by declining collateral values as housing prices decline.
  • Council members discussed the signs of stabilisation in the Sydney and Melbourne housing markets, evident in both housing prices and auction clearance rates. They observed that the adjustment over the past two years has been sizeable and conditions in most other capital cities continue to be soft. Risks to lenders from housing price falls have to date been limited by the strength of the labour market, low interest rates and the improvement in lending standards in recent years. Housing loan arrears have continued to edge higher, but with significant variation between regions.
  • Members were updated on ASIC’s public consultation on its responsible lending guidance. The responsible provision of credit is a cornerstone of consumer protection and is important to the Australian economy. It was noted that the consultation is not about increasing requirements; but rather, clarifying and updating guidance on existing requirements. For example, ASIC may further clarify areas where the law does not require responsible lending requirements to be applied (e.g. in small business lending). The Council agencies will continue to closely monitor developments in financing and the housing market.
  • ASIC’s product intervention powers. ASIC updated the Council on its proposed approach to the new product intervention power, legislation for which passed in April 2019. This gives ASIC the power to proactively intervene where a financial product has resulted or is likely to result in significant detriment to consumers. ASIC has launched a public consultation on its approach. Council members discussed possible applications of the new power given it is now available for use.
  • Product design and distribution obligations. The Council also discussed the implications of new product design and distribution obligations for retail holdings of bank-issued Additional Tier 1 (AT1) instruments. Members encouraged issuers to review their practices for issuing AT1 instruments ahead of the commencement of the new obligations in April 2021. They noted that APRA would continue to treat all AT1 instruments as regulatory capital, capable of absorbing losses in the unlikely event of a bank failure. Members discussed the importance that all holders of AT1 instruments, particularly retail investors, recognise that AT1 instruments could be written down or converted to equity.
  • Policy developments. Members discussed a number of policy developments, including the implementation of the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. APRA provided an update on its policy work, including changes to its guidance on the minimum interest rate used in serviceability assessments for residential mortgage lending (announced on the morning of the meeting). APRA also updated the Council on its planned increases in the loss-absorbing capacity of ADIs to support orderly resolution. Members discussed proposals by New Zealand authorities to significantly increase Tier 1 capital ratios for banks in New Zealand.
  • Financial market infrastructure (FMI). The Council’s FMI Steering Committee provided an update on the design of a crisis management legislative framework for clearing and settlement facilities. This will ensure the necessary powers to resolve a distressed domestic clearing and settlement facility. A second consultation is now planned for late 2019. The Committee has also considered proposals for enhancements to the agencies’ supervisory powers and other changes to improve the regulatory framework in relation to market infrastructures. The results of the Council’s consultation findings will be provided to Government, to assist with policy design and the drafting of associated legislation (the draft of which would also be consulted on before being introduced to Parliament).
  • Stored-value payment facilities. The Council discussed elements of a potential regulatory framework for payment providers that hold stored value, following a public consultation in 2018. Discussion focused on suitable criteria to determine the regulatory regime that should apply to providers of stored-value facilities, along with the adequacy of consumer protection arrangements. Once completed, the conclusions of this work will be provided to the Government for consideration.
  • Competition in the financial system. Council agencies and the Australian Competition and Consumer Commission (ACCC) are developing an online tool to improve the transparency of the mortgage interest rates paid on new loans. This follows a recommendation of the Productivity Commission’s inquiry into Competition in the Australian Financial System. The tool relies on a new data collection and is expected to be available in 2020.
  • Climate change. Council members noted the work undertaken by regulators to address the implications of the changing climate, and society’s response to those changes, for the Australian financial system.
  • Updated Charter. The Council agreed to adopt an updated Charter, which is being published today. The Charter emphasises the Council’s financial stability objective, while also recognising the benefits of a competitive, efficient and fair financial system. It also highlights the Council’s focus on cooperation and collaboration to support the activities of its member agencies.

In conjunction with the Council meeting, the Council agencies held their annual meeting with other Commonwealth regulators of the financial sector. This included representatives from the ACCC, the Australian Taxation Office and the Australian Transaction Reports and Analysis Centre (AUSTRAC). Topics discussed included enforcement and data initiatives affecting the financial sector.

Confidence Fades As APRA Caves Again… And Other Stories [Podcast]

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
Confidence Fades As APRA Caves Again… And Other Stories [Podcast]



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Confidence Fades As APRA Caves Again… And Other Stories

A quick round-up of some of today’s news, including the latest falls in unit sales, APRA’s latest climb down, consumer and business confidence and ASIC move to curtail some of the excesses in the short term consumer credit market where people might pay 990%.