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Stable Finance Industry Through World Class Prudential Management

Stable Finance Industry Through World Class Prudential Management. Tom Karp Executive General Manager Supervisory Support Australian Prudential Regulation Authority. Overview. World Class Prudential Regulation. Conditions for Effective Supervision

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Stable Finance Industry Through World Class Prudential Management

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  1. Stable Finance Industry Through World Class Prudential Management Tom Karp Executive General Manager Supervisory Support Australian Prudential Regulation Authority

  2. Overview

  3. World Class Prudential Regulation

  4. Conditions for Effective Supervision Supervision Objectives & Supervisory Authority Licensing Fit & Proper Persons Changes in Control Risk Management Assets & Liabilities Derivatives Capital Adequacy and Solvency Information Disclosure Fraud & AML/CFT Information Sharing Laws & Standards

  5. Supervision • Market Analysis • Reporting & Off-site Monitoring • Entity Risk Assessment • On-site Visits • Intervention • Enforcement & Sanctions • Wind-up & Exit • Group-wide Supervision

  6. International Benchmarks • BCBS Banking Core Principles • IAIS Insurance Core Principles • IMF/World Bank FSAP Process

  7. Supervision Characteristics • Risk-based • Forward-looking • Pre-emptive • Boards & Management Primarily Responsible

  8. Corporate Governance

  9. Corporate Governance - What is it? • How directors & management oversee an institutions business • Board is Focal Point for Governance System • Approve Governance System • Delegate Authority for Implementation • Ultimately Responsible  Ensure Compliance • Corporations Generally • Strategic Guidance of Company • Effective Monitoring of Management • Accountable to Shareholders & Market • Prudentially Regulated Entities • Managed Prudently  Beneficiaries Interests • Prudential Requirements

  10. Effective Corporate Governance Structure • Board Reviews & Approves Entity's Business Strategies & Significant Policies • Board Determines & Approves • Tolerance for Risk • Risk Management Strategy • Board Ensures Effective Risk Controls in Place • Clear Distinction between Responsibilities of Board, Chairman, CEO & Senior Management • Board Leads in Establishing Entity's Culture, Ethical Values & Business Behaviour

  11. Effective Corporate Governance Outcomes • Board & Senior Management well understand Entity's Business & are in control • Entity Complies with all Laws, Regulatory Requirements & Established Codes of Conduct • Entity has Prudent Behaviour & Effective Risk Management • Beneficiary Obligations are met, even in stress situations • Entity is regarded as good corporate citizen, which balances the interests of its owners, employees, beneficiaries and the community generally

  12. Board Attributes & Behaviours • Attributes • Independence - of mind/free from other parties • Expertise - collectively/ business/wisdom • Diligence - time & willingness/learn to probe • Prudence - stewardship/meet promises • Transparency - decisions/reporting/escalation • Behaviours • Ensure Supervisor has full & cooperative access to all information needed for Proper Risk Assessment • Aware of Material Issues Raised by Supervisor & Critically Assess Management’s Proposed Response

  13. International Financial Reporting Standards

  14. Issues • Classification of Equity Instruments • Consolidation of SPVs • Financial Asset & Liability Measurement • Capitalisation of Acquisition Costs • EMVONA • General Provisions for Impairment • DB Fund Surplus & Deficits

  15. APRA Approach • No Change Initially • Re-institute Current Outcome as far as possible • Overview & Position Papers

  16. Basel II

  17. Objectives • Better Align Regulatory Capital to Underlying Risks • Recognise Improvements in Capital Methodologies of Best Practice Banks • Provide Right Incentives for Sound Risk Management • Cover Risks More Comprehensively • Explicit Charges for Credit, Market & Operational Risk • Refer to Other Risks but No Specific Capital Method • Applicable to a Wide Range of Banks & Systems • Maintain a Reasonable Level Playing-Field for all Banks • Broadly Maintain Same Overall Level of Capital Currently in the Banking System • Capital Requirements for Individual Banks may vary substantially

  18. Framework • Pillar 1 – Minimum Regulatory Capital • Risk-based Amounts for each of • Credit Risk • Market Risk • Operational Risk • Pillar 2 – Appropriate Risk Assessment & Capital • Considered in respect of each Individual Bank • Cover Issues & Risks not covered by Pillar 1 • Carried out by both Bank & Supervisor • Pillar 3 – Transparency for Market Discipline • Cover Capital, Risks and Management of these • Impacted by Accounting Disclosure Requirements • “Sunshine the best disinfectant”

  19. Implementation • Commencement date not entirely harmonised internationally • Country Discretions for Flexibility • Regulators to make Many Decisions • Reduce International Harmonisation • Range of Deposit-Takers • Need to cope for all BUT Equitably • Cross Border Issues • Consolidated Banking Supervision • Home and Host Supervisor Cooperation • Costs & Expertise • Significant for major banks • Significant for Regulators

  20. Risk Management

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