Banking (prudential standard) determination No. 8 of 2006 Prudential Standard APS 221 Large Exposures (Cth)
Banking (prudential standard) determination No. 8 of 2006
Prudential standard APS 221 – Large Exposures
as amended
made under section 11AF of the
Banking Act 1959
This compilation was prepared on 2 September 2009
taking into account amendments up to Banking (prudential standards) determination No. 9 of 2006 – Variation to Prudential Standard APS 221 Large Exposures
Prepared by the Office of Legislative Drafting and Publishing,
Attorney-General’s Department, Canberra
I, John Francis Laker, Chair of APRA:
(a)under paragraphs 11AF(1)(a) and (b) of the Banking Act 1959 (the Act), DETERMINE the Prudential standard APS 221 – Large Exposures in the form set out in the Schedule, which shall apply to all authorised deposit-taking institutions (ADIs) and authorised non-operating holding companies (authorised NOHCs); and
(b)under subsection 11AF(3) of the Act, REVOKE the Prudential Standard APS 221 – Large Exposures, as varied, made by an instrument dated 25 November, 2002 entitled Making of Prudential Standards: APS 110 (Capital Adequacy); APS 111 (Capital Adequacy: Measurement of Capital); APS 221 (Large Exposures); APS 222 (Associations with Related Entities).
This instrument shall take effect from the later of 1 July 2006 and the date of registration on the Federal Register of Legislative Instruments.
Dated 30 May 2006
[Signed]
John Francis Laker
Chair
Interpretation
In this Determination
ADI has the meaning given in section 5 of the Act.
APRA means the Australian Prudential Regulation Authority.
authorised NOHC has the meaning given in section 5 of the Act.
Note 1 An ADI or authorised NOHC that does not comply with a standard may be issued with directions by APRA under paragraph 11CA(1)(a) of the Act. Non-compliance with a direction is an offence attracting a penalty of up to 250 penalty units for a body corporate (currently $27,500) for each day that the offence continues. Officers of the ADI or authorised NOHC may also be criminally liable (see section 11CG).
Note 2 Prudential Standard APS 221 – Large Exposures made on 25 November, 2002 was varied by an instrument dated 15 December 2004 entitled Banking (prudential standards) determination No. 2 of 2004.
Schedule
Prudential standard APS 221 – Large Exposures comprises the 7 pages commencing on the following page.
Prudential Standard APS 221
Large Exposures
Objective and key requirements of this Prudential Standard
This Prudential Standard aims to ensure that ADIs implement proper measures and prudent limits to monitor and control their large exposures on both a stand-alone and group basis.
Authority and application
This Prudential Standard, made under section 11AF of the Banking Act 1959 (the Act), applies to all authorised deposit-taking institutions (ADIs) authorised under the Act.
This Prudential Standard does not apply to foreign ADIs in Australia which are subject to the consolidated supervision by their home country supervisors in respect of credit concentrations and large exposure limits. However, foreign ADIs should detail their large exposure and risk concentration policies as well as the relevant high level controls in the risk management systems descriptions required under Prudential Standard APS 310 Audit & Related Arrangements for Prudential Reporting. As part of its prudential oversight of the Australian operations of a foreign ADI, APRA may discuss with the foreign ADI’s parent and home supervisor any undue credit risk concentrations associated with the branch’s Australian activities.
Control of large exposures and risk concentrations
An ADI[1] is exposed to various forms of risk concentration with the potential to incur significant losses that could materially threaten the ADI’s financial strength. Risk concentrations may arise from excessive exposures to individual counterparties, groups of related counterparties, groups of counterparties with similar characteristics (e.g. counterparties in specific geographical regions or industry sectors) or to particular asset classes (e.g. property holdings or other investments). Safeguarding against risk concentrations to particular counterparties,[2] industries, countries and asset classes must form an essential component of ADI's risk management strategies.[3]
[1] This Prudential Standard applies to exposures of an ADI at Level 1 (i.e. the stand-alone level) and Level 2 (i.e. the consolidated banking group level) defined in accordance with Prudential Standard APS 110 Capital Adequacy (APS 110). Any reference to an “ADI” or “ADIs” in this Prudential Standard applies to the ADI or ADIs on both a stand-alone and a consolidated banking group basis.
[2] As a general rule, unlimited exposures to any individual counterparties (e.g. a general guarantee of the obligations of a counterparty) are not permitted.
[3] For the purposes of this Prudential Standard, the relevant policies and high level controls should be detailed in the ADIs’ risk management systems descriptions required under Prudential Standard APS 310 Audit & Related Arrangements for Prudential Reporting.
The Board of directors (Board) of an ADI is responsible for establishing, and monitoring compliance with, policies governing large exposures and risk concentrations of the ADI. The Board must ensure that these policies are reviewed regularly (at least annually) and that they remain adequate and appropriate for the ADI. Any material changes to established policies must be approved by the Board.
An ADI’s large exposures policy must, as a minimum, cover the following:
(a)exposure limits for:
(i) various types of counterparties (e.g. governments, ADIs and foreign equivalents, corporate and individual borrowers);
(ii) a group of related counterparties;
(iii) individual industry sectors (where applicable);
(iv) individual countries (where applicable); and
(v) various asset classes (e.g. property holdings and other investments, etc.)
that are commensurate with the ADI’s capital base and balance sheet size;
(b)the circumstances in which the above exposure limits may be exceeded and the authority required for approving such excesses (e.g. by the ADI’s Board or a board committee); and
(c)the procedures for identifying, reviewing, controlling and reporting large exposures of the ADI.
The Board and senior management of an ADI should ensure that:
(a)adequate systems and controls are in place to identify, measure, monitor and report large exposures and risk concentrations of the ADI in a timely manner; and
(b)large exposures and risk concentrations of the ADI are kept under regular review.
An ADI must, where appropriate, conduct stress testing and scenario analysis of its large exposures and risk concentrations to assess the impact of changes in market conditions or key risk factors (e.g. economic cycles, interest rate, liquidity conditions or other market movements) on its risk profile and earnings.
Definitions
A large exposure is an exposure to a counterparty or a group of related counterparties which is greater than or equal to 10% of an ADI’s capital base.[4]
[4] The 10% threshold applies to an ADI’s exposure at both Level 1 and Level 2 on a net basis (i.e. net of exposures excluded under paragraph 9(b) below). The ADI’s capital base at Level 1 and Level 2 is measured in accordance with Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111).
An exposure to a counterparty or a group of related counterparties is the aggregate of all claims, commitments and contingent liabilities arising from on- and off-balance sheet transactions (in both the banking and trading books) with the counterparty or group of related counterparties, and
(a)includes, but is not limited to:
(i) outstanding balances of all loans and advances;
(ii) holdings of debt and/or equity securities;
(iii) all unused advised off-balance sheet commitments (refer Guidance Note AGN 112.2 Risk-Weighted Off-Balance Sheet Credit Exposures (AGN 112.2)), whether revocable or irrevocable; and
(iv) the credit equivalent amounts of all market-related contracts (calculated in accordance with AGN 112.2 or Guidance Note AGN 112.3 Netting where netting applies[5]);
[5] For large exposure purposes, netting by novation and close-out netting are permissible for market-related contracts provided all the requirements set out in Guidance Note AGN 112.3 Netting for bilateral netting are met. Multilateral netting and netting of exposures against offsetting positions held by a group of related counterparties are not recognised for the purposes of this Prudential Standard.
(b)excludes:
(i) exposures (e.g. claims or equity investments) deducted from an ADI’s capital (refer Prudential Standard APS 111 Capital Adequacy: Measurement of Capital);
(ii) exposures to the extent that they are secured by cash deposits (subject to satisfying the criteria set out in Guidance Note AGN 112.1 Risk-Weighted On-Balance Sheet Credit Exposures (AGN 112.1) for the purpose of this Prudential Standard);
(iii) exposures to the extent that they are guaranteed by, or secured against securities issued by, governments or central banks (subject to satisfying the conditions set out in AGN 112.1 for the purpose of this Prudential Standard);
(iv) exposures arising in the course of settlement of market-related contracts;
(v) exposures to an ADI required as part of a liquidity support arrangement that has been certified by APRA;[6] under section 11CB of the Act; and
[6] Refer section 11CB of the Banking Act 1959.
(vi) exposures to the extent that they have been written off or specifically provided for.
A group of related counterparties should be deemed to exist where two or more individual counterparties are linked by:
(a)cross guarantees;
(b)common ownership or management;
(c)the ability to exercise control over the other(s), whether direct or indirect;
(d)financial interdependency such that the financial soundness of any of them may affect the financial soundness of the other(s); or
(e)other connections or relationships which, according to an ADI’s assessment, identify the counterparties as constituting a single risk.
As a general rule, family members are not to be treated as connected where they have independent retail relationships with an ADI (although an ADI can choose to treat such exposures as connected should it consider appropriate to do so).
Prudential limits
The aggregate exposure of an ADI to a counterparty or a group of related counterparties is subject to the following limits:[7]
[7] These limits apply to an ADI’s exposure at both Level 1 and Level 2 on a net basis. The ADI’s capital base at Level 1 and Level 2 is measured in accordance with APS 111.
(a)external parties (other than governments, central banks and ADIs or equivalent overseas deposit-taking institutions) unrelated to the ADI – 25% of capital base;
(b)unrelated ADI (or equivalent overseas deposit-taking institution) and its subsidiaries – 50% of capital base, with aggregate exposure to non-deposit-taking subsidiaries capped at 25% of capital base; and
(c)foreign parents and their subsidiaries[8] – 50% of capital base, with aggregate exposure to non-deposit-taking subsidiaries capped at 25% of capital base.
[8] Prudential limits on an ADI’s exposures to other related entities are set out in Prudential Standard APS 222 Associations with Related Entities.
Although certain types of exposure (e.g. settlement risk, exposure secured by eligible collateral) and counterparties (governments and central banks) are excluded from the above prescribed limits, these exposures are not risk free. ADIs should have adequate procedures and controls in place (e.g. by way of internal limits) to monitor these exposures.
ADIs should treat the 25% limit as the upper limit for an exposure to a non-government, non-ADI counterparty. APRA expects ADIs to establish lower internal limits to any non-government, non-ADI counterparty commensurate with their risk appetite.
Notwithstanding paragraph 11, APRA may, in writing, set specific limits on an ADI’s exposures to particular counterparties, groups of counterparties, industry sectors, countries or asset classes, including property holdings and any other investments, on a case-by-case basis, having regard to the ADI’s individual circumstances.
Approval requirements
An ADI must obtain APRA’s prior approval for any proposed exposures in excess of the prescribed limits set out in paragraph 11 or alternative limit determined under paragraph 14. Such approval will only be granted on an exceptions basis. The ADI concerned must be able to satisfy APRA why the proposed exposure(s) might reasonably be expected not to expose the ADI to excessive risk. APRA may impose a higher minimum capital ratio on the ADI at Level 1 and/or Level 2 (refer Prudential Standard APS 110 Capital Adequacy (APS 110)) to compensate for the additional risk that may be associated with the proposed exposure(s).
Notification requirements
An ADI must notify APRA immediately of any breach of the prescribed limits under paragraph 11 or other specific limits imposed by APRA under paragraph 14, including remedial actions taken or planned to deal with the breach.
An ADI must inform APRA immediately where it has concerns that its large exposures or risk concentrations have the potential to impact materially upon its capital adequacy, along with proposed measures to address these concerns.
Prior consultation requirements
An ADI must consult with APRA prior to committing to any proposed exposures to non-government, non-ADI counterparties in excess of 10% of its capital base.[9]
[9] The 10% prior consultation requirement applies to any proposed exposures of an ADI at both Level 1 and Level 2 on a net basis (i.e. net of exposures excluded under paragraph 9(b) above). The ADI’s capital base at Level 1 and Level 2 is measured in accordance with APS 111.
APRA may, in writing, set a higher consultation threshold or waive the prior consultation requirements for individual ADIs where APRA is satisfied with the robustness of the ADI’s credit risk management systems and controls.
Concentration of risk
Where an ADI has a number of large exposures (excluding exposures set out in paragraph 9(b) and any exposure to governments and central banks) or where in APRA’s opinion, the ADI is exposed to a significant level of risk concentration, APRA may require the ADI to maintain a higher capital ratio at Level 1 and/or Level 2 (refer APS 110). In considering whether an ADI’s capital ratio should be increased, APRA will take account of the following factors:
(a)consistency with the ADI’s policy on large exposures and risk concentrations;
(b)the number of exposures, their individual size and nature; and
(c)the characteristics of the ADI, including the nature of its business and the experience of its management.
APRA may also direct an ADI to take measures to reduce its level of risk concentration.
Reporting
An ADI must provide APRA each quarter, or more frequently if required by APRA, with information on its large exposures, including exposures to foreign parents and their subsidiaries where applicable, in a form to be determined by APRA from time to time.
Where necessary, APRA may impose additional reporting requirements on an ADI in relation to its large exposures and risk concentrations.
Foreign ADIs are required to report quarterly to APRA, or more frequently if required by APRA, on the large exposures of their Australian operations in a form to be determined by APRA from time to time.
Notes to the Banking (prudential standard) determination No. 8 of 2006
Prudential standard APS 221 – Large Exposures
Note 1
The Banking (prudential standard) determination No. 6 of 2006 – Prudential standard APS 221 – Large Exposures (in force under section 11AF of the Banking Act 1959) as shown in this compilation is amended as indicated in the Tables below.
Table of Instruments
| Year and | Date of FRLI registration | Date of | Application, saving or transitional provisions |
| No. 8 of 2006 | 5 June 2006 (see F2006L01714) | 1 July 2006 | |
| No. 9 of 2006 | 30 June 2006 (see F2006L02109) | 1 July 2006 | — |
Table of Amendments
| ad. = added or inserted am. = amended rep. = repealed rs. = repealed and substituted | |
| Provision affected | How affected |
| Footnote 4 to para. 8............ | am. No. 9 of 2006 |
| Para. 14.................................. | am. No. 9 of 2006 |
| Para. 15.................................. | am. No. 9 of 2006 |
| Para. 16.................................. | am. No. 9 of 2006 |
| Para. 20.................................. | am. No. 9 of 2006 |
| Footnote 9 to para. 18.......... | am. No. 9 of 2006 |
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