- By: Staff Editor
- Date: June 13, 2013
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APRA Prudential Standard 221 Large Exposures requires authorized deposit-taking institutions to implement prudent measures and to set prudent limits to monitor and control their large exposures, on both a Level 1 and Level 2 basis. This Prudential Standard applies to all authorized deposit-taking institutions (ADIs) except:
- Purchased payment facility providers (PPF providers)
- Foreign ADIs in Australia that are subject to consolidated supervision by their home country supervisors
Control of Large Exposures and Risk Concentrations
- The Board should establish and monitor compliance with policies governing large exposures and risk concentrations of the ADI.
- The Board should ensure that the large exposures policies are reviewed regularly, at least annually.
- The Board should ensure that the large exposures policies remain adequate and appropriate for the ADI.
- Any material changes to the established large exposures policies should be approved by the Board.
- The large exposures policy should at least cover the following:
- Exposure limits for:
- Various types of counterparties (e.g. governments, ADIs and foreign equivalents, corporate and individual borrowers)
- A group of related counterparties
- Individual industry sectors
- Individual countries
- Various asset classes (e.g. property holdings and other investments, etc.)
- The circumstances in which the above exposure limits may be exceeded and the authority required for approving such excesses
- The procedures for identifying, reviewing, controlling and reporting large exposures of the ADI.
- The Board and senior management of an ADI should ensure that:
- 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.
- Large exposures and risk concentrations of the ADI are regularly reviewed.
- An ADI should 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 on its risk profile and earnings.
Prudential limits
- The aggregate exposure of an ADI to counterparty or a group of related counterparties is subject to the following limits:
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Type of deposit-taking institutions
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Limits to the aggregate exposures
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External parties (other than governments, central banks and ADIs or equivalent overseas deposit-taking institutions) unrelated to the ADI
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25 per cent of Regulatory Capital
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Unrelated ADI (or equivalent overseas deposit-taking institution) and its subsidiaries
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50 per cent of Regulatory Capital, with aggregate exposure to non-deposit-taking subsidiaries capped at 25 per cent of Regulatory Capital
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Foreign parents and their subsidiaries
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50 per cent of Regulatory Capital, with aggregate exposure to non-deposit-taking subsidiaries capped at 25 per cent of Regulatory Capital.
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- The APRA can 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, with regard to the ADI’s individual circumstances.
Approval requirements
- An ADI should obtain the APRA’s prior approval for any proposed exposures in excess of the prescribed limits.
- Such approval should be granted on an exceptions basis.
- The ADI concerned should be able to satisfy the APRA why the proposed exposures might reasonably be expected not to expose the ADI to excessive risk.
Notification requirements
- An ADI should notify the APRA immediately of any breach of the prescribed limits including remedial actions taken or planned to deal with the breach.
- An ADI should inform the 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 should consult the APRA prior to committing to any proposed exposures to non-government, non-ADI counterparties in excess of 10 per cent of its regulatory capital
- The APRA can 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
- The APRA needs the ADI to maintain a higher capital ratio at Level 1 and/or Level 2, where
- ADI has a number of large exposures
- ADI is exposed to a significant level of risk concentration,
- The APRA should take account of the following factors to consider whether an ADI’s capital ratio should be increased:
- Consistency with the ADI’s policy on large exposures and risk concentrations
- Number of exposures, their individual size and nature
- Characteristics of the ADI, including the nature of its business and the experience of its management.
- The APRA can direct an ADI to take measures to reduce its level of risk concentration.
Additional Resources
Read the APRA Standard for Large Exposures in full.
