Financial Sector (Collection of Data) (reporting standard) determination No. 7 of 2008 ARS 113.3 Internal Ratings-based (IRB) Approach to Credit Risk Retail (Cth)
Financial Sector (Collection of Data) (reporting standard) determination No. 7 of 2008
Reporting standard ARS 113.3 Internal Ratings-based (IRB) Approach to Credit Risk – Retail
Financial Sector (Collection of Data) Act 2001
I, Wayne Stephen Byres, a delegate of APRA, under paragraph 13(1)(a) of the Financial Sector (Collection of Data) Act 2001 (the Act) and subsection 33(3) of the Acts Interpretation Act 1901 DETERMINE Reporting Standard ARS 113.3 Internal Ratings-based (IRB) Approach to Credit Risk – Retail in the form set out in the Schedule, which applies to financial sector entities to the extent provided in paragraph 2 of the reporting standard.
Under section 15 of the Act, I DECLARE that the reporting standard shall begin to apply to those financial sector entities on the later of 1 April 2008 and the date of registration of this instrument on the Federal Register of Legislative Instruments.
Dated 4th February 2008
[Signed]
Wayne Byres
Executive General Manager
Diversified Institutions Division
Interpretation
In this Determination
APRA means the Australian Prudential Regulation Authority.
Federal Register of Legislative Instruments means the register established under section 20 of the Legislative Instruments Act 2003.
Schedule
Reporting Standard ARS 113.3 Internal Ratings-based (IRB) Approach to Credit Risk – Retail comprises the 27 pages commencing on the next page.
Reporting Standard ARS 113.3
Internal Ratings-based (IRB) Approach to Credit Risk – Retail
Objective of this reporting standard
This reporting standard is made under section 13 of the Financial Sector (Collection of Data) Act 2001.
This reporting standard outlines the overall requirements for the provision of information to APRA in relation to an authorised deposit-taking institution’s retail exposures under the internal ratings-based approach to credit risk. It should be read in conjunction with:
the versions of Form ARF 113.3A IRB Retail – Residential Mortgages, Form ARF 113.3B IRB Retail – Qualifying Revolving, Form ARF 113.3C IRB Retail – Other and Form ARF 113.3D IRB Retail – SME designated for an authorised deposit-taking institution reporting at Level 1 and Level 2, and the associated instructions (all of which are attached and form part of this reporting standard); and
Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk.
Purpose
Data collected in Form ARF 113.3A IRB Retail – Residential Mortgages (ARF 113.3A), Form ARF 113.3B IRB Retail – Qualifying Revolving (ARF 113.3B), Form ARF 113.3C, IRB Retail - Other (ARF 113.3C) and Form ARF 113.3D IRB Retail – SME (ARF 113.3D) is used by APRA for the purpose of prudential supervision, including assessing compliance with Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113). It may also be used by the Reserve Bank of Australia and the Australian Bureau of Statistics.
Application
This reporting standard applies to an authorised deposit-taking institution (ADI) that has APRA’s approval or is seeking APRA’s approval to use the internal ratings-based approach to credit risk for capital adequacy purposes.
This reporting standard may also apply to the non-operating holding company (NOHC) of an ADI (refer to paragraph 4).
Information required
An ADI to which this reporting standard applies must provide APRA with the information required by the versions of ARF 113.3A, ARF 113.3B, ARF 113.3C and ARF 113.3D designated for an ADI at Level 1 for each reporting period.
If an ADI to which this reporting standard applies is part of a Level 2 group, the ADI must also provide APRA with the information required by the versions of ARF 113.3A, ARF 113.3B, ARF 113.3C and ARF 113.3D designated for an ADI at Level 2 for each reporting period, unless the ADI is a subsidiary of an authorised NOHC. If the ADI is a subsidiary of an authorised NOHC, the ADI’s immediate parent NOHC must provide APRA with the information required by that form for each reporting period. In doing so, the immediate parent NOHC must comply with this reporting standard (other than paragraphs 3 and 10) as if it were the relevant ADI.
Forms and method of submission
The information required by this reporting standard must be given to APRA in electronic form, using one of the electronic submission mechanisms provided by the ‘Direct to APRA’ (also known as ‘D2A’) application.
Note: the Direct to APRA application software may be obtained from APRA.
Reporting periods and due dates
Subject to paragraph 7, an ADI to which this reporting standard applies must provide the information required by this reporting standard for each quarter based on the financial year (within the meaning of the Corporations Act 2001) of the ADI.
APRA may, by notice in writing, change the reporting periods, or specified reporting periods, for a particular ADI, to require it to provide the information required by this reporting standard more frequently, or less frequently, having regard to:
(a)the particular circumstances of the ADI;
(b)the extent to which the information is required for the purposes of the prudential supervision of the ADI; and
(c)the requirements of the Reserve Bank of Australia or the Australian Bureau of Statistics.
The information required by this reporting standard must be provided to APRA within 30 business days after the end of the reporting period to which the information relates.
APRA may grant an ADI an extension of a due date in writing, in which case the new due date for the provision of the information will be the date on the notice of extension.
Quality control
The information provided by an ADI under this reporting standard (except for the information required under paragraph 4) must be the product of processes and controls that have been reviewed and tested by the external auditor of the ADI. AGS 1008 ‘Audit Implications of Prudential Reporting Requirements for Authorised Deposit-taking Institutions’, issued by the Auditing and Assurance Standards Board provides guidance on the scope and nature of the review and testing required from external auditors. This review and testing must be done on an annual basis or more frequently if necessary to enable the external auditor to form an opinion on the accuracy and reliability of the data.
All information provided by an ADI under this reporting standard must be subject to processes and controls developed by the ADI for the internal review and authorisation of that information. It is the responsibility of the board and senior management of the ADI to ensure that an appropriate set of policies and procedures for the authorisation of data submitted to APRA is in place.
Authorisation
When an ADI submits information under this reporting standard using the ‘Direct to APRA’ software, it will be necessary for an officer of the ADI to digitally sign, authorise and encrypt the relevant data. For this purpose, APRA’s certificate authority will issue ‘digital certificates’, for use with the software, to officers of the ADI who have authority from the ADI to transmit the data to APRA.
Minor alterations to forms and instructions
APRA may make minor variations to:
(a)a form that is part of this reporting standard, and the instructions to such a form, to correct technical, programming or logical errors, inconsistencies or anomalies; or
(b)the instructions to a form, to clarify their application to the form
without changing any substantive requirement in the form or instructions.
If APRA makes such a variation it must notify in writing each ADI that is required to report under this reporting standard.
Interpretation
In this reporting standard:
ADI means an authorised deposit-taking institution within the meaning of the Banking Act 1959.
APRA means the Australian Prudential Regulation Authority established under the Australian Prudential Regulation Authority Act 1998.
authorised NOHC has the meaning given in the Banking Act 1959.
business days means ordinary business days, exclusive of Saturdays, Sundays and public holidays.
immediate parent NOHC means an authorised NOHC, or a subsidiary of an authorised NOHC, that is an immediate parent NOHC within the meaning of paragraph 10(b) of Prudential Standard APS 110 Capital Adequacy (APS 110).
Level 1 has the meaning in APS 110.
Level 2 has the meaning in APS 110.
reporting period means a period mentioned in paragraph 6 or, if applicable, paragraph 7.
subsidiary has the meaning in the Corporations Act 2001.
Reporting Forms ARF 113.3A, ARF 113.3B, ARF 113.3C and ARF 113.3D
IRB Retail – Residential Mortgages, Qualifying Revolving, Other and SME
Instruction Guide
This instruction guide is designed to assist in the completion of the IRB Retail suite of forms. This suite of forms consists of the following:
(a)Form ARF 113.3A IRB Retail – Residential Mortgages (ARF 113.3A);
(b)Form ARF 113.3B IRB Retail – Qualifying Revolving (ARF 113.3B);
(c)Form ARF 113.3C IRB Retail – Other (ARF 113.3C); and
(d)Form ARF 113.3D IRB Retail – SME (ARF 113.3D).
These forms capture the credit risk-weighted assets (RWA) and risk components of retail exposures under the internal ratings-based (IRB) approach to credit risk. In completing these forms, authorised deposit-taking institutions (ADIs) should refer to Prudential Standard APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk (APS 113).
General directions and notes
Reporting entity
These forms are to be completed at Level 1 and Level 2[1] by each ADI that has APRA’s approval or is seeking APRA’s approval to use the IRB approach to credit risk for capital adequacy purposes, in accordance with APS 113.
[1] Level 1 and Level 2 are defined in accordance with Prudential Standard APS 110 Capital Adequacy.
If an ADI is a subsidiary of an authorised non-operating holding company (NOHC), the report at Level 2 is to be provided by the ADI’s immediate parent NOHC.[2]
[2] Refer to paragraph 4 of Reporting Standard ARS 113.3 Internal Ratings-based (IRB) Approach to Credit Risk – Retail.
Securitisation deconsolidation principle
Except as otherwise specified in these instructions, the following applies:
Where an ADI (or a member of its Level 2 consolidated group) participates in a securitisation that meets APRA’s operational requirements for regulatory capital relief under Prudential Standard APS 120 Securitisation (APS 120):
(a)special purpose vehicles (SPVs) holding securitised assets may be treated as non-consolidated independent third parties for regulatory reporting purposes, irrespective of whether the SPVs (or their assets) are consolidated for accounting purposes;
(b)the assets, liabilities, revenues and expenses of the relevant SPVs may be excluded from the ADI’s reported amounts in APRA’s regulatory reporting returns; and
(c)the underlying exposures (i.e. the pool) under such a securitisation may be excluded from the calculation of the ADI’s regulatory capital (refer to APS 120). However, the ADI must still hold regulatory capital for the securitisation exposures[3] that it retains or acquires, and such exposures are to be reported in Form ARF 120.0 Standardised – Securitisation or Forms ARF 120.1A to ARF 120.1C IRB – Securitisation (as appropriate). The RWA relating to such securitisation exposures must also be reported in Form ARF 110.0 Capital Adequacy.
[3] Securitisation exposures are defined in accordance with APS 120.
Where an ADI (or a member of its Level 2 consolidated group) participates in a securitisation that does not meet APRA’s operational requirements for regulatory capital relief under APS 120, or the ADI elects to treat the securitised assets as on-balance sheet assets under Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk or APS 113, such exposures are to be reported as on-balance sheet assets in APRA’s regulatory reporting returns. In addition, these exposures must also be reported as a part of the ADI’s total securitised assets within Form ARF 120.2 Securitisation – Supplementary Items.
Reporting period and timeframe for lodgement
These forms are to be completed as at the last day of the stated reporting period (i.e. the relevant quarter) and submitted to APRA within 30 business days after the end of the relevant reporting period.
Requirements applying to certain ADIs reporting under the forms
The following particular requirements apply to certain ADIs:
| Description of ADI | Reporting requirement | Timeframe for lodgement |
| ADI is operating under Basel II[4] APS 112 standardised approach, but has applied to adopt (or APRA has indicated that it proposes to approve it for) the IRB approach for most or all of its operations | Report under ARF 113.3A, ARF 113.3B, ARF 113.3C and ARF 113.3D (the forms) in respect of relevant operations to be covered by the IRB approach (for purposes of assessing prospective credit risk component of regulatory capital calculation after IRB approval (i.e. “parallel run” of data)) | Within 30 business days of end of reporting period |
| ADI has IRB approval, but some operations remain under Basel II standardised approach | Report under the forms in respect of relevant operations that are covered by the IRB approach (for purposes of calculating credit risk component of regulatory capital) | Within 30 business days of end of reporting period |
[4] If an ADI is required to apply the Basel I capital adequacy standards pending APRA’s determination of an application made before 1 January 2008 for approval to use the internal ratings-based approach to credit risk and/or an advanced measurement approach to operational risk, the ADI must report under the Basel I capital reporting standards: refer to Reporting Standard ARS 150 Capital Adequacy: Basel II Transition (Advanced ADIs) and paragraph 14 of Prudential Standard APS 150 Capital Adequacy: Basel II Transition (Advanced ADIs).
These ADIs will also have certain reporting obligations under Form ARF 112.1A Standardised Credit Risk – On-balance Sheet Assets and Form ARF 112.2A Standardised Credit Risk – Off-balance Sheet Exposures.
Unit of measurement
These forms are to be completed in millions of Australian dollars (AUD) rounded to one decimal place, unless otherwise specified in this instruction guide.
Amounts denominated in foreign currency are to be converted to AUD in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates.
Scope
An ADI is to report in ARF 113.3A, ARF 113.3B, ARF 113.3C and ARF 113.3D:
all on-balance sheet and off-balance sheet retail exposures in its banking book that are subject to the IRB approach, including those that expose the ADI to counterparty credit risk, except the following specifically excluded items (refer to APS 113):
(a)those assets or investments that are required to be deducted from Tier 1 or Tier 2 capital under Prudential Standard APS 111 Capital Adequacy: Measurement of Capital; and
(b)securitisation exposures, which are subject to the requirements of APS 120; and
all retail exposures in its trading book that expose the ADI to counterparty credit risk (refer to APS 113).
Definitions
In this instruction guide and its corresponding reporting forms (ARF 113.3A, 113.3B, 113.3C and 113.3D), the following expressions have the defined meanings as set out below:
Retail exposures
Refer to APS 113 for definitions of the retail IRB asset class and its associated sub-asset classes.
SME retail exposures
A small- and medium-sized enterprise (SME) retail exposure is a small business exposure, which can be treated as a retail exposure in accordance with APS 113.
Specific instructions
The following instructions are applicable at Level 1 and (where relevant) Level 2.
These forms do not calculate the RWA and expected loss (EL) amounts. An ADI completing these forms is required to disclose these data items based on its own regulatory capital calculations.
Section A: On-balance sheet risk-weighted assets and expected loss amount
Column 1. PD by band
For the purposes of reporting on the IRB retail asset class, probability of default (PD) bands have been pre-defined within the forms. Pools of exposures are to be allocated to the pre-defined PD bands in the forms, based on an ADI’s own internal estimates of PD for each pool of retail exposures.
Column 1 includes a row with a 100 per cent PD to be used for all defaulted exposures.
Column 2. Exposures before CRM
Exposure at default (EAD) estimates are to be calculated in accordance with Attachment C to APS 113.
Report exposures before credit risk mitigation (CRM) in the relevant row.
Column 3. Exposures after CRM
Derived field that totals the exposures after CRM by LGD bands for a PD band.
Columns 4.1 to 4.9 (or 4.13/4.14) Exposures after CRM by LGD bands
Refer to Attachment C to APS 113 for details of the recognition of CRM for the IRB retail asset class.
For reporting purposes, loss given default (LGD) bands have been pre-defined within the forms. An ADI’s LGD estimates are to be grouped into these specified LGD bands. LGD estimates are to be calculated in accordance with APS 113.
For ARF 113.3A, the LGD bands that have been provided begin below the minimum LGD required by APS 113 for exposures in the residential mortgage sub-asset class. This is relevant for reporting purposes only. For details on calculation of the RWA, refer to Column 7. RWA below.
Report exposures after CRM in:
(a)Columns 4.1 to 4.9 in ARF 113.3A;
(b)Columns 4.1 to 4.13 in ARF 113.3B and ARF 113.3C; and
(c)Columns 4.1 to 4.14 in ARF 113.3D.
Pools of exposures are to be allocated to the column for the appropriate LGD band and the row for the relevant PD band, based on an ADI’s own internal estimates of LGD and PD for each pool of retail exposures.
Column 5. Weighted average LGD
Report the exposure-weighted average LGD, as a percentage rounded to two decimal places, for exposures allocated to each PD band.
Exposure-weighted average LGD = LGDi x EAD i / EAD i
Where:
LGDi = the LGD associated with the ith exposure of the PD band.
EADi = the EAD associated with the ith exposure allocated to the PD band.
Total
This is a disclosed amount and not a derived field. Report the exposure-weighted average LGD for total non-defaulted on-balance sheet retail exposures.
Column 6. Weighted average PD
Report the exposure-weighted average PD, as a percentage rounded to two decimal places, for exposures allocated to each PD band.
Exposure-weighted average PD = PDi x EAD i / EAD i
Where:
PDi = the PD associated with the ith exposure of the PD band.
EADi = the EAD associated with the ith exposure allocated to the PD band.
Total
This is a disclosed amount and not a derived field. Report the exposure-weighted average PD for total non-defaulted on-balance sheet retail exposures.
Column 7. RWA
RWA are to be calculated in accordance with the requirements of APS 113, including the application of either the minimum LGD required under APS 113, or an alternative higher minimum LGD required by APRA, for exposures in the residential mortgage sub-asset class (refer to Attachment C to APS 113).
Report the sum of RWA for exposures allocated to each PD band in the relevant rows.
Column 8. EL amount
EL amount is to be calculated in accordance with APS 113. Report the sum of the EL amounts for exposures allocated to each PD band in the relevant rows.
Row – Weighted average LGD
Report the exposure-weighted average LGD, as a percentage rounded to two decimal places, for exposures allocated to each LGD band.
Weighted average LGD = LGDi x EAD i / EAD i
Where:
LGDi = the underlying LGD estimate associated with the ith exposure allocated to the LGD band.
EADi = the EAD associated with the ith exposure allocated to the LGD band.
Section B: Off-balance sheet risk-weighted assets and expected loss amount
Off-balance sheet exposures include both non-market-related (including undrawn lines) and market-related off-balance sheet transactions.
For the following columns in the off-balance sheet schedule, refer to the instructions in section A of this instruction guide:
(a)Column 1. PD by band;
(b)Column 2. Exposures before CRM;
(c)Column 3. Exposures after CRM;
(d)Columns 4.1 to 4.9 (or 4.13/4.14). Exposures after CRM by LGD bands;
(e)Column 5. Weighted average LGD;
(f)Column 6. Weighted average PD;
(g)Column 7. RWA; and
(h)Column 8. EL amount.
Also, refer to the instructions in section A of this instruction guide for reporting weighted average LGD for each LGD band.
Refer to Attachment C to APS 113 for further details on the calculation of EAD for off-balance sheet retail exposures.
Memorandum items: breakdown of non-market-related off-balance sheet exposures
Report the breakdown of non-market-related off-balance sheet retail exposures (refer to Attachment C to APS 113).
Column 1. Nature of transaction
Report the nature of the non-market-related off-balance sheet transactions (e.g. commitments, direct credit substitutes, performance-related contingencies (refer to Attachment C to APS 113 for further details)). This field is limited to 80 characters.
Column 2. Notional amount
Report the notional amount (or the undrawn amount in the case of undrawn commitments) of off-balance sheet exposures after CRM in the relevant row for each transaction type listed in column 1.
Column 3. Credit equivalent amount
The credit equivalent amount is calculated by multiplying the notional amount/undrawn amount of off-balance sheet exposures for a transaction type by the appropriate credit conversion factors (refer to Attachment C to APS 113). Report the credit equivalent amounts in the relevant row for each transaction type.
Section C: Memorandum items: purchased receivables
Report the breakdown of RWA and EL amount for default risk and dilution risk for all pools of purchased receivables, which are included in the calculation of RWA and EL amount for retail exposures in sections A and B of the forms.
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