FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Australia

The supervisory and regulatory framework in Australia consists of three main bodies:

• Australia Prudential Regulatory Authority (APRA)
• Australian Securities and Investments Commissions (ASIC)
• Reserve Bank of Australia (RBA)

FRSGlobal in Australia

The Australian financial system remained resilient throughout the financial crisis and Australian banks have rebounded. Australia was one of the first advanced economies to raise interest rates - three times since October 2009 - and the government removed the wholesale funding guarantee for financial institutions in March 2010.

However, those investors that were able to reduce their exposures to Australian banks did so very quickly in favour of other issuers. This was compounded by investors not differentiating between Australian institutions of similar credit rating. This led to liquidity disappearing from the country’s financial system.

As a result, 11th September 2009 APRA released a discussion paper: ‘APRA’s prudential approach to ADI liquidity risk’. The proposed liquidity changes will impact firms in three ways, namely governance and controls, stress-testing and reporting. The introduction of new templates/formats suggested in the report signifies major changes to the returns for Authorised Deposit-taking Institutions (ADIs).

This is just one of the approaches that have been proposed by one of Australia’s regulators. One thing we know for sure is that while global financial imbalances are continuing to be resolved, increased regulation is not going to go away, if anything it will be more stringent.

Regulatory Environment — Australia

Financial

Balance sheet reporting

This type of reporting is concerned with the information on balance sheet and profit and loss required by regulators to assess the financial position of businesses. It includes monthly reports on statement of financial position required by the Australian Prudential Regulation Authority (APRA), Reserve Bank of Australia (RBA), and Australian Bureau of Statistics (ABS). In addition, there are usually a number of breakdown reports like impaired assets, deposits and loans classified by state and territory, intra-group receivables and payable, interest on income and expenses and other operating income and expenses, business finance, commercial finance statistics, securities held or issued, off balance sheet exposure analysis etc.

Points of presence reporting
This includes annual reports which are required by the APRA and the ABS to collect information about the type and locality of service delivery channels, or “points of presence” for Authorised Deposit-taking Institutions (ADIs) within Australia.

Prudential

Capital Adequacy Reporting
Australia’s capital adequacy requirement is based on the Basel II framework and is required by the APRA to assess compliance and prudential supervision. Capital adequacy reporting is generally centred round risk reporting and is mainly concerned with credit risk, market risk and operational risk. It includes reports on calculation of capital requirements using standard and advanced approaches for various risk categories, capital adequacy assessment process, etc. In addition it also includes quarterly reports on securitization and repricing analysis (assessing interest rate risk) denominated in domestic currency and foreign currency.

Interest rate risk reporting
These are quarterly reports submitted to the APRA and the RBA to assess an Authorised Deposit-taking Institution’s repricing gap in banking books. ADIs are required to submit the combined currency position and individual material currency position which is over 5% of the total book value of the banking book items.

Large exposures reporting
These are quarterly reports submitted to the APRA and the RBA to collect information on an Authorised Deposit-taking institution’s large credit exposures splitting between related and non related parties’ exposures.

Operational (Transactional)

Securities reporting
Securities reporting includes monthly or quarterly reports to show the net purchase amount of equity or long term debt securities during the reporting period.

Balance of payment reporting
The Australian Bureau of Statistics (ABS) requires quarterly Form 90 reports to collect data on the foreign investment in Australia, Australian investment abroad and foreign debt to compile the balance of payment statement.

Cross border exposures
Cross border exposures reports are required by the APRA, the RBA, the ABS and the Bank for International Settlement (BIS) to be submitted on quarterly basis. These reports are mainly concerned with exposures on cross border claims and liabilities broken down by sector, maturities, currencies, country on immediate or ultimate risk basis etc.

What’s coming up: Australia

Basel II

The Australian Prudential Regulation Authority (APRA) has released amendments to relevant prudential standards; prudential practice guides (PPGs) and reporting forms to enhancements to the Basel II Framework in Australia. The Basel II Framework is a global capital regime

The changes to APRA's prudential standards include:

• Higher capital requirements to capture the credit risk of complex trading activities and The introduction of a stressed value-at-risk (VaR) requirement
• Higher risk-weights for so-called 'resecuritization' exposures to better reflect the risk inherent in these products, and increased credit conversion factors for short-term liquidity facilities provided to off-balance sheet conduits
• Requirements in relation to valuation practices and the capture of off-balance sheet and Securitization activities
• Increased disclosure requirements for securitizations and off-balance sheet exposures.

The following prudential standards and the associated reporting forms and instructions will come into effect as of 1 January 2012.

• Capital Adequacy
  • Prudential Standard APS 111 Capital Adequacy: Measurement of Capital (APS 111)
  • Prudential Standard APS 116 Capital Adequacy: Market Risk (APS 116)
  • Reporting Standard ARS 110.0 Capital Adequacy (ARS 110.0)
  • Reporting Forms ARF 110.0.1 Capital Adequacy (Level 1) (ARF 110.0.1) and ARF 110.0.2 Capital Adequacy (Level 2) (ARF 110.0.2)
  • Reporting Forms ARF 110.0.1 and ARF 110.0.2 Capital Adequacy: Instruction Guide
  • Prudential Standard APS 310 Audit and Related Matters (APS 310)
  • Prudential Standard APS 330 Capital Adequacy: Public Disclosure of Prudential Information (APS 330)
• Market Risk
  • Prudential Practice Guide APG 116 Market Risk (APG 116)
  • Reporting Standard ARS 116.0 Market Risk (ARS 116.0)
  • Reporting Form ARF 116.0 Market Risk (ARF 116.0)
  • Reporting Form ARF 116 Market Risk: Instruction Guide
• Securitization
  • Prudential Standard APS 120 Securitization (APS 120)
  • Prudential Practice Guide APG 120 Securitization (APG 120)
  • o Reporting Standard ARS 120.0 Standardized Approach – Securitization (ARS 120.0)
  • Reporting Standard ARS 120.1 Internal Ratings-based (IRB) Approach – Securitization (ARS 120.1)
  • Reporting Standard ARS 120.2 Securitization – Supplementary Items (ARS 120.2)
  • Reporting Form ARF 120.0 Standardized Approach – Securitization (ARF 120.0)
  • Reporting Forms ARF 120.1A, ARF 120.1B and ARF 120.1C Internal Ratings-based (IRB)
  • Approach – Securitization (ARF 120.1A, ARF 120.1B, ARF 120.1C)
  • Reporting Form ARF 120.2 Securitization – Supplementary Items (ARF 120.2)
  • Reporting Form ARF 120.0 Securitization: Instruction Guide
  • Reporting Forms ARF 120.1A, 120.1B, 120.1C Securitization: Instruction Guide
  • Reporting Form ARF 120.2 Securitization: Instruction Guide

Basel III

The Australian Prudential Regulation Authority (APRA) has clarified the treatment of high quality liquid assets it will apply when implementing the new global liquidity standard announced by the Basel Committee on Banking Supervision (Basel Committee) in December 2010.

The new global liquidity standard — known as the Liquidity Coverage Ratio (LCR) requirement — aims to ensure that banking institutions hold a stock of high quality liquid assets sufficient to survive an acute stress scenario lasting for one month.

The LCR requirement comes into effect on 1 January 2015. During the preceding ‘observation period’, the Basel Committee will be testing a number of additional qualitative and quantitative criteria to evaluate the liquidity characteristics of Level 2 assets. Depending on the outcome of this work and on market developments over this period, it is possible that some instruments may become eligible as Level 2 assets, or the range of qualifying Level 1 assets may expand, by the time the LCR requirement is introduced in Australia.

Asset & Liability Management (ALM)

ALM is being embraced as more than just a tool to monitor and manage interest rate risk in banking books. It is a process for managing balance sheets against other risks that affect earnings and portfolio valuations of banks, shifts in customer behaviour, future balance sheet growth and impact of business strategies (pricing, hedging, growth and planning).

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating their ALM model. In order to earn an adequate return, the need to assess and mitigate the adverse value and income impact of changes in the market has become even more vital.

So how do different types of financial institutions manage their ALM requirements today?

Large, tier 1 firms typically develop their ALM systems in-house; a luxury few smaller firms can’t afford. These systems typically include sophisticated and finely tuned functionality for Value exposure, Value at risk, Dynamic simulation, Earnings at risk and Treasury view.

In the past, smaller firms have found solutions for meeting ALM requirements to be over-complicated, difficult to integrate with incumbent systems, resource-dependent and cost-prohibitive. For these reasons they have resorted to using alternative methods such as spreadsheets or independent consultants, neither of which is ideal.

Until now the sheer cost of developing and supporting an in-house ALM system has been prohibitive to smaller firms but the need to have accurate visibility into the future position of the firm is critical.

Our heritage and in-depth knowledge of market have enabled the configuration of our solution to be so flexible that it meets the needs of ALL firms; from those with highly complex derivatives to those with a vanilla approach.

Our ALM solution provides a comprehensive range of capabilities that cover the following areas:

• Value exposure / market risk (static)
  For a consistent and comprehensive assessment of the adverse value impact of changes in market risk factors based on common pricing models using gap analysis and analytical/numerical stress testing analysis
• Value at risk / market risk (static)
  To calculate the loss potential of a specific portfolio or the total balance sheet over a given time horizon and confidence level
• Dynamic simulation (“what if” NII analysis)
  To assess and manage income, using a dynamically modelled balance sheet and market environment
• Earnings at risk (interest rate models)
  To calculate the potential to lose income, and to value it in a dynamically modelled balance sheet and market environment
• Treasury view
  To assess the exposure and risk position of Treasury, using the risk management techniques applied by the firm

And for the smaller firm

Our rich ALM solution offers a functionally that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. Along with evaluating a mismatch between assets and liabilities, our ALM solution also manages risks arising due to liquidity and interest rate in banking books.

With our ALM solution firms can:

• Quantify the value impact of interest rate changes over the total balance sheet based on regulatory requirements
• Conduct stress testing / value impact of any risk factor change over the total balance sheet
• Benefit from robust processes with audit ability and traceability, reverse processing from results to initial input using modelling (strategies & scenarios)
• Meet processing times / frequency of analysis and reduce manual work
• View Balance Sheet value impacts from interest rate moves in terms of sensitivity, liquidity and margin
• Utilise a simple financial analysis framework
• Make use of a flexible reporting tool and standard export to standard formats (Excel, PDF, HTML, XML)

FRSGlobal 6-step process for ALM

Basel II

Embracing advanced Basel II approaches and capital management practices

Australia, one of the leading adopters of Basel II in the Asia Pacific and Japan region, and a gateway to principal financial centres, implemented the simple as well as the most advanced approaches of Basel II guidelines into their national regulations from 2008.

For effective Basel II framework implementation, the Australian Prudential Regulation Authority (APRA) synchronizes with Authorised Deposit Institutions (ADIs) on improvements to risk measurement, risk management and data management.

In addition, the APRA allows banks using the IRB approach for credit risk capital calculations to use the Advanced Measurement Approaches (AMA) to calculate operational risk.

Based on measures released by the Basel Committee on Banking Supervision (BCBS) on enhancements to Basel II framework, the APRA recently amended their prudential regulations and reporting.

These changes aims to ensure that risks inherent in portfolios of banks relating to trading activities, securitizations and exposures to off-balance sheet vehicles are better reflected in minimum capital requirements and risk management practices.

The amended prudential standards and reporting forms will be effective as of 1 January 2012. The APRA is also implementing a number of other amendments to its prudential standards on capital to clarify existing provisions and support the implementation of the Basel II enhancements.

Our solution provides a sophisticated Basel II module with the ability to calculate the capital charge for credit risk, market risk and operational risk. It can be used as an independent stand alone solution or in combination with our other reporting and risk management solutions assisting banks to meet regulatory requirements and improve their performance over risk.

Capital Adequacy Reporting Videos

A series of videos explaining various aspects of Capital Adequacy Reporting.

• What is Capital Adequacy Reporting?



• What is the purpose of Basel?



• RiskPro or RegPro?



• What does the FRSGlobal solution cover?



• What are the analysis methods?

IFRS

Harmonisation of global accounting standards

Australia is one of the early adopters of the International Financial Reporting Standards. The Australian Accounting Standards Board (AASB) has issued 'Australian equivalents to IFRS' (A-IFRS). A-IFRS is required for all private sector reporting entities and acts as the basis for public sector reporting since 2005.

To improve the reporting requirements for financial instruments the IASB introduced IFRS 9- Financial instruments which eventually will supersede IAS 39. It covers the classification and measurement of financial assets along with a methodology for impairment and hedge accounting.

The objective of IFRS 9 is to establish principles for reporting of financial assets that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of the entity’s future cash flows.

Recently the IASB issued an exposure draft suggesting the mandatory effective date of IFRS 9 to be changed to annual periods beginning on or after 1 January 2015 (currently 1 January 2013). The comment period of the exposure draft will close on 21 October 2011.The draft also suggests that the proposed deferral would only change the date when IFRS 9 would be mandatory and entities could still elect to use IFRS 9 before 2015.

IFRS 9 equivalent Australian standard AASB 9 will be applicable for annual reporting periods based on final decisions by the IASB but is available for early adoption from the date of issue.

Our IFRS solution enables classification of financial instruments and calculation of valuations using appropriate fair values or amortised costs. It also supports several methods for testing and estimating impairment as required by IAS 39.

Read more about the FRSGlobal IFRS solution here.

Liquidity Risk Management

With lessons learnt from the recent liquidity crunch, banks are going beyond simple static financial ratios and gap reports as measures of liquidity risk management. Recent efforts by the European Banking Authority – EBA (formerly Committee of European Banking Supervisors- CEBS), the Basel Committee on Banking Supervision (BCBS) and the UK FSA in terms of principles and recommendations have set greater emphasis on liquidity risk management.

Since the Basel Committee on Banking Supervision issued its final paper on ‘Principles for Sound Liquidity Risk Management and Supervision’, banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheets.

By modelling their liquidity contingency plans against such scenarios, the measure of a bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of its plan against such crisis.

In response to the Basel committee‘s revised set of principles for sound liquidity risk management and supervision, the Australian Prudential Regulatory Authority (APRA) issued a discussion paper on APRA’s prudential approach to ADI liquidity risk on 11 September 2009.

The APRA in its discussion paper proposed enhancements to its current liquidity reporting requirements that are twofold regular liquidity data and ad hoc liquidity data. The main objective is to introduce a standardised reporting framework for collecting regular liquidity data from all Authorised Deposits Institutions (ADIs) and ad-hoc information in case of liquidity stress scenarios.

The regular liquidity data, to be provided on quarterly basis includes a contractual maturity schedule, cash flow analysis; stress test results for APRA defined scenarios or High Quality Liquid Assets (HQLA), funding concentration and liquid assets portfolio composition.

Our liquidity reporting solution supports the current and proposed requirements of APRA and covers returns subject to reporting based on liquidity prudential standard (APS 210).