Supervising Financial Conglomerates: the Australian Experience

Transcription

1 Supervising Financial Conglomerates: the Australian Experience Helen Rowell Executive General Manager Australian Prudential Regulation Authority Twelfth Annual International Seminar on Policy Challenges for the Financial Sector 8 June 2012 Washington, D.C. 1

2 Agenda APRA s approach to supervision of financial conglomerates Key challenges of supervising conglomerates APRA s proposed framework for conglomerate supervision 2

3 APRA s supervision hierarchy Level 1 Licensed entities on a standalone basis Authorised Deposit-taking Institutions (ADIs), general (P&C) insurers, life insurers and pension trustees/funds Level 2 Specialist groups operating primarily in one sector e.g. banking or insurance Level 3 (proposed) Consolidated groups operating in two or more sectors, or with material non-apra regulated entities 3

4 Typical simplified group structure Level 3 group Level 2 group ADI (Level 3 Head) Unregulated financial entity APRAregulated entity Level 2 group Level 3 group Unregulated entity Life Insurer Pension Fund Material Unregulated entity 4

5 Supervising conglomerates currently Supervise APRA regulated entities within each group Broader group risks and issues, including non-apra regulated entities, covered as part of regular supervision Meetings with Boards & senior management across groups Access to information covering broader group Consider governance, risk management, and capital 5

6 Supervising conglomerates - challenges Assessing and understanding complex group structures Forming consistent view of capital position across complex groups consolidation/deduction approach not sufficient Identifying intra-group transactions & exposures, double gearing and/or excessive leverage Obtaining clear view of governance and risk management for non-apra regulated entities Common denominator = contagion risk 6

7 Supervising conglomerates - proposed Proposed prudential framework objectives Minimise risk of failure of conglomerate groups Level 1 and Level 2 beneficiary protection Level 3 failure minimisation and systemic stability Holistic view of group-wide activities, intra-group relationships and large exposures Consistent application of requirements regardless of industry, structure or mix of businesses Address variety of corporate structures 7

8 Components of the framework Identifying Level 3 groups Group governance and risk management requirements Group capital adequacy requirements Supervisory approach No relief from Level 1 and Level 2 requirements 8

9 Governance & risk management Requirements apply to (APRA-regulated) head entity of Level 3 group Head of group required to ensure broader compliance by group entities Qualitative risk concentration and intra-group exposure requirements; supplement quantitative requirements at Level 1 & 2 9

10 Group capital adequacy - key concepts Board approved group capital management plan Equity-equivalent approach to capital Building block approach for required capital Top down approach for eligible capital Transferability assessment for surplus group capital Pillar 2 requirements 10

11 Conglomerates framework - challenges Determination of Level 3 groups Capital adequacy calculation: basis CET1? Tier 1? Total? accommodating different (and changing) industry capital requirements calculation for unregulated entities (especially nonfinancial) QIS transferability assessment Approach to application of qualitative requirements across the group 11

12 Conglomerates framework - observations Complex rules not the right response to complex risks Must be able to regulate the head of the group Boards must be empowered Healthy information and sound risk management at least as important as capital Proactive supervision is critical 12

13 Supervising Financial Conglomerates: the Australian Experience Helen Rowell Executive General Manager Australian Prudential Regulation Authority Twelfth Annual International Seminar on Policy Challenges for the Financial Sector 8 June 2012 Washington, D.C. 13