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Chapter 3: The prudential framework

The prudential framework in Australia has made a significant contribution to the relative success of the Australian financial system in negotiating the global financial crisis. Further acknowledgment of that contribution came during 2011/12 from the Financial Stability Board (FSB) in its Peer Review of Australia and by the International Monetary Fund (IMF) in its 2011 Article IV Consultation with Australia. As the IMF noted, 'Banks [in Australia] were resilient to the global crisis, mainly because of sound regulation and supervision. Prudential rules, often tighter than the minimum international standards... together with a proactive approach to supervision, helped maintain a healthy and stable financial sector.'
In response to lessons learned in the crisis, prudential frameworks globally are being substantially reinforced to ensure that financial institutions will be able to withstand future stresses without extraordinary government support. Notwithstanding its relative success, Australia cannot stand aloof from these developments and, indeed, APRA's prudential policy workload in 2011/12 was more intense than at any time since its establishment. Implementation of key aspects of the global reform agenda has been a major driving force but APRA has also had significant initiatives of domestic origin under way in the general and life insurance industries, and in superannuation.
The global reform agenda of the G-20 Leaders has four objectives:
  • a strong regulatory framework for banks built on much higher quality and quantity of capital and liquidity buffers;
  • more effective oversight and supervision to complement new, stronger rules (see Chapter 4);
  • reducing the risks posed by systemically important financial institutions; and
  • transparent international assessment and peer review.
APRA's prudential policy activities under the first objective have centred on the Basel Committee on Banking Supervision's broad program of capital and liquidity reforms. Implementation of these reforms has made good progress. A new area of activity for APRA is now opening up under the third objective. The Basel Committee has finalised a framework for dealing with domestic systemically important banks and, once it is endorsed by the G-20 Leaders, APRA will consider how this framework will be implemented in Australia. In line with the fourth objective, APRA is now subject to greater external scrutiny on its adherence to global standards and the rigour of its supervisory approach. The FSB's Peer Review of Australia in 2011 was the first such review of Australia under a commitment by FSB members to undergo periodic peer reviews, and APRA was actively involved. APRA also had a significant involvement in the IMF's Financial Sector Assessment Program review of Australia in 2011/2012.
APRA's domestic policy agenda involves three main initiatives. The first, now largely complete, is the updating and harmonisation of capital requirements for general and life insurers. The second, an important outcome of the Government's Stronger Super reforms, is a substantial enhancement to the prudential regime for superannuation based on APRA's new standards-making powers. The third major initiative is the development of a prudential framework for conglomerate groups.
Response to the global financial crisis
Strengthening banking system capital requirements
The first step in APRA's implementation of the Basel Committee's capital reforms was a package of measures to enhance the Basel II Framework. The measures aim to ensure that the risks inherent in ADIs' portfolios related to trading activities, securitisations and exposures to off-balance sheet vehicles are better reflected in minimum capital requirements, risk management practices and accompanying disclosures to the public.
Amendments to relevant ADI prudential standards and reporting requirements that gave effect to these so called Basel 2.5 enhancements came into force in Australia from 1 January 2012, in line with the internationally agreed timetable. As expected, they have had only limited impact on ADI capital positions.
The second step is the more comprehensive Basel III package, which includes measures to raise the quality and minimum required levels of capital, promote the build-up of capital buffers and establish a back up leverage ratio. There are two new regulatory capital buffers. One is a conservation buffer above the regulatory minimum capital requirement that can be utilised in periods of stress, subject to restrictions on distributions. The other is a countercyclical buffer that will be imposed when excessive credit growth and other indicators point to a build up in systemic risk. Central to the package is a new definition of regulatory capital that gives greater weight to common equity, the highest quality form of capital. The Basel Committee's package was endorsed by the G-20 Leaders in November 2010 and the Basel III rules text was released the following month.
APRA's formal consultation on the Basel III capital reforms began in September 2011 and concluded, for the major measures, with the release of a final set of prudential standards and reporting standards in September 2012. These standards come into effect on 1 January 2013. The remaining Basel III measures on counterparty credit risk will be finalised later in 2012. Consultation has involved separate rounds of discussions on APRA's proposed approach and on the prudential standards in draft form, as well as an industry-wide public conference, hosted by the Financial Services Institute of Australia (Finsia), on the Basel III reforms and their implementation.
APRA's approach to the Basel III capital reforms has three main elements. Firstly, APRA is adopting the Basel III rules text as globally agreed, with minor exceptions in areas where APRA has to date taken a more conservative approach and will continue to do so. Secondly, for in-principle reasons, APRA is not utilising the discretion available under the Basel III reforms to provide a concessional treatment for certain items in calculating regulatory capital. In APRA's view, adoption of the concessional treatment would not be consistent with the principle of raising the quality and quantity of regulatory capital. Thirdly, APRA's Basel III timetable commences at the early end of the globally agreed timetable in some areas. This is fully consistent with the Basel Committee's view that, where they can, banking institutions should comply with the Basel III reforms as soon as possible. ADIs must meet the revised Basel III minimum requirements for common equity (after regulatory adjustments) from 1 January 2013, and the capital conservation buffer from 1 January 2016, without any additional phase-in arrangements. Starting from a strongly capitalised position, ADIs are well placed to meet this accelerated timetable.
The Basel Committee has developed a standardised disclosure template that is intended to address concerns raised during the crisis in a number of jurisdictions, including Australia, about the international comparability of 'headline' regulatory capital ratios. APRA will be consulting with the ADI industry to ensure that the template provides a simple and straight-forward reconciliation between the Basel III rules text and APRA's more conservative approach.
Strengthening banking system liquidity requirements
In parallel with its Basel III capital reforms, the Basel Committee in December 2010 released its rules text for a new global liquidity framework, intended to promote stronger liquidity buffers that will make banking systems more resilient to liquidity stresses. The centrepiece of the Basel III liquidity reforms are two new quantitative global standards — the Liquidity Coverage Ratio, aimed at strengthening the short-term resilience of banks, and the Net Stable Funding Ratio, aimed at promoting longer-term resilience by requiring banking institutions to fund their activities with more stable sources of funding. The Liquidity Coverage Ratio will come into effect on 1 January 2015 and the Net Stable Funding Ratio on 1 January 2018. The Basel III liquidity reforms also involve a strengthening of governance and risk management of liquidity risks — the so-called qualitative requirements — consistent with the Basel Committee's revised Principles for Sound Liquidity Risk Management and Supervision.
In November 2011, APRA released a discussion paper and draft prudential standard setting out its proposals for implementation of the Basel III liquidity reforms, continuing a consultation process on liquidity risk management that had begun in September 2009. APRA is proposing that all ADIs in Australia meet the enhanced qualitative requirements, in a way that is commensurate with the nature, scale and complexity of the institution. However, only the larger, more complex ADIs will need to meet the two new quantitative requirements. In this area, APRA is proposing to introduce the Basel III rules text with only minor modifications, related either to the exercise of supervisory discretions or where clarifications are required for Australian circumstances. APRA is also proposing to follow the globally agreed implementation timetable.
The Basel Committee is using the lead-in periods before implementation as observation periods, monitoring the implications of the two standards for financial markets, credit extension and economic growth, and it will address unintended consequences as necessary. Monitoring is covering some general issues, such as the impact of the standards on smaller institutions versus larger and on retail versus wholesale business activities, as well as some specific technical issues. APRA will finalise its prudential standard once the detailed elements of the Basel III liquidity reforms are in place.
Under the Liquidity Coverage Ratio, liquidity stresses are intended to be addressed as much by expanding stable funding sources and extending the maturity of liabilities as by building up high-quality liquid asset portfolios. This point is especially relevant for Australia, which does not have sufficient high-quality liquid assets (particularly sovereign debt) for inclusion in liquidity buffers. Australia will adopt an alternative treatment available to it in the Basel III rules. Under this treatment, which was announced by the Reserve Bank of Australia (RBA) and APRA in December 2010, any shortfall between an ADI's holdings of high-quality liquid assets and its Liquidity Coverage Ratio requirement will be able to be met through a Committed Liquidity Facility with the RBA, for a fee payable to the RBA. The availability of such a Facility must, however, be balanced against the overriding objective of the new global liquidity framework of improving the self-reliance of banking institutions in liquidity management and reducing their recourse to their central bank at early signs of stress. For that reason, APRA has stepped up its dialogue with the larger ADIs on the balance sheet adjustments and other measures needed to show they have taken 'all reasonable steps' to improve their self-reliance, before recourse to the Facility to meet the Liquidity Coverage Ratio requirement. ADIs have made a good start in this direction through lengthening the maturity of new wholesale funding and actively seeking more stable funding sources through domestic deposits.
Systemically important banks
The new element in global banking reform is a framework for dealing with domestically systemically important banks (D-SIBs). This framework, developed by the Basel Committee and the Financial Stability Board, responds to the strongly held view of the G-20 Leaders that no financial firm should be 'too big to fail' and that taxpayers should not bear the cost of resolution. The framework builds on, but differs in important respects from, the regime for global systemically important banks (G-SIBs) endorsed by the G-20 Leaders in November 2011.
The G-SIB regime focusses on large, internationally active banks with significant cross-border activities and it addresses the 'too big to fail' issue through higher capital requirements, strengthened supervisory oversight and robust recovery and resolution plans for G-SIBs. No Australian bank is on the current list of G-SIBs. The D-SIB framework recognises that there are many banks that are not significant at the global level but could, if they were to come under stress, have an important impact on their domestic financial system and economy compared to non systemic institutions.
In June 2012, the Basel Committee released a consultative document on its proposed framework for dealing with D-SIBs. The framework requires that D-SIBs have a greater ability to absorb losses as a going concern, but it differs from the prescriptive approach in the G-SIB regime in that it does not specify capital 'buckets' into which a country would fit different D-SIBs. Under the principles-based approach, APRA would be required to establish a methodology for assessing the degree to which banks are systemically important in Australia, publicly disclose information that provides an outline of the methodology employed and ensure that any D-SIB has higher loss absorbency, commensurate with its systemic importance and fully met by common equity.
A final version of the D-SIB framework is now awaiting endorsement by the G-20 Leaders. The framework will come into effect from 1 January 2016.
APRA's crisis management powers
APRA has a relatively robust set of legal powers to enable it to respond effectively to situations of financial distress. These powers were strengthened during the course of the crisis through legislative reforms in 2008, 2009 and 2010. The changes covered various aspects of APRA's preventative directions and failure management powers, including those relating to the appointment of a statutory manager (to an ADI) or a judicial manager (to a general or life insurer), as well as powers relating to its role in administering the two Financial Claims Schemes (for ADIs and general insurers). During 2011/12, as part of an ongoing review of the efficiency and operation of financial sector legislation, APRA worked closely with Treasury to develop proposals to further strengthen APRA's ability to respond effectively to financial distress. The proposals address some remaining gaps and deficiencies in APRA's crisis resolution powers and seek to align these powers more closely with international principles and practice.
The review culminated in the release in September 2012 of a Treasury Consultation Paper, Strengthening APRA's Crisis Management Powers, which seeks comments on a range of options to enhance APRA's supervision and resolution powers. The options canvassed in the paper aim to:
  • strengthen APRA's crisis management powers in relation to all APRA-regulated industries, including extending APRA's power to appoint a statutory manager to an ADI's authorised non-operating holding company (NOHC) and subsidiaries in a range of distress situations and providing APRA with the option to appoint a statutory manager to a general insurer or life insurer (and to its authorised NOHC and subsidiaries) as an alternative to a judicial manager appointed by the Court;
  • provide APRA with direction powers to require superannuation entities to take pre-emptive action to address prudential concerns;
  • simplify and harmonise APRA's regulatory powers across the various industry Acts it administers; and
  • make a number of technical amendments to enhance the effectiveness of these Acts.
Harmonised prudential standards
General and life insurance capital standards
APRA's reforms to capital standards for the general insurance and life insurance industries are now almost complete, and new prudential standards will come into effect from 1 January 2013. This project, which commenced in 2010 and has involved four rounds of industry consultation on the policy proposals, aims to make the capital standards more risk-sensitive, improve their alignment across regulated industries where appropriate and take account of relevant international developments.
For general insurance, the reforms will ensure that all known material risks, including asset/liability mismatch, asset concentration, insurance concentration and operational risks, are adequately addressed within the capital standards.
For life insurance, the changes are more fundamental. The current dual reporting requirements for solvency and capital adequacy will be simplified and, by introducing the concept of a 'capital base' for life insurers, the capital structure for life insurers will be aligned with that for general insurers and ADIs. This improved alignment of capital requirements across the three industries will also facilitate adoption of APRA's proposed framework for the supervision of conglomerate groups.
Following two earlier rounds of consultation and two quantitative impact studies (QIS), APRA commenced a third round of consultation in December 2011, with the release of a second response to submissions paper and 14 draft prudential standards. This package detailed more specific proposals on APRA's approach to harmonising the definition of capital for insurers with the Basel III definition of capital. The package also provided information on the results of the second QIS and outlined APRA's proposed case-by-case approach for any transition arrangements. A fourth round of consultation with industry commenced in May 2012, with the release of a third response to submissions paper and final versions of most of the capital standards issued in December 2011. Draft prudential standards on the composition of the capital base were also released.
APRA released draft guidance material for consultation in late September 2012 and expects to release the remaining capital standards in final form in October 2012. APRA has also consulted on changes to reporting standards required to implement the reforms, releasing a consultation package in June 2012.
An important component of the guidance material related to the Internal Capital Adequacy Assessment Process (ICAAP). APRA expects that the ICAAP, which includes the management of deviations from the capital target set by the board above minimum prudential requirements, will be developed by an insurer's senior management with input as appropriate from relevant areas and experts. However, the ICAAP is fundamentally the responsibility of the Board: the Board needs to be actively engaged in the development of the ICAAP and its implementation, and must ultimately approve the ICAAP. While many insurers will already be doing much of what would be required in a well-developed ICAAP under their current capital management processes, others will need to make more fundamental changes.
Based on the QIS results, APRA's reforms are likely to increase overall capital requirements across both industries but that increase is expected to be moderated as insurers optimise their business and capital management strategies in response to the revised capital standards. The impact of the reforms is also likely to vary widely between insurers, with some insurers expected to experience reductions in required capital whilst others are expected to face an increase, perhaps material in certain cases. In APRA's assessment, this range of outcomes is consistent with the aim of enhancing the risk-sensitivity of the capital standards; it is also manageable by industry with appropriate case-by-case transition arrangements agreed with APRA.
Supervision of conglomerate groups
During 2011/12, APRA continued to develop its proposed prudential framework for conglomerate ('Level 3') groups. These are groups (containing APRA-regulated institutions) that have material operations in more than one APRA-regulated industry and/or have one or more material entities operating in non-APRA regulated businesses. The objective of this substantial initiative is to better protect the interests of beneficiaries (depositors, policyholders and superannuation fund members) by limiting the risks to APRA-regulated institutions — from contagion, reputation and operational risks in particular — that may arise from that institution's membership of a conglomerate group. The initiative also aims to ensure that both APRA and the group itself have a broader understanding of the financial and operational soundness of the group, irrespective of its structure and variety of operations.
APRA's proposals for the supervision of conglomerate groups were outlined in a discussion paper released in March 2010. The proposals seek to ensure that a conglomerate group holds adequate capital to protect the APRA-regulated institutions from potential contagion and other risks within the group and that the parent entity meets a range of principles-based governance and risk management standards. The proposals, which build on APRA's existing requirements for stand alone institutions (Level 1) and single-industry groups (Level 2), would introduce a complementary layer of prudential requirements that harmonise existing standards and industry-specific supervision frameworks at the group level.
APRA conducted a QIS with potential Level 3 groups during 2010/11 to assess the impact of its capital adequacy proposals. During 2011/12, APRA refined its proposals to take into account the Basel III, general and life insurance, and Stronger Super reforms and engaged closely with potential Level 3 groups on a further analysis of impact. In May 2012, APRA advised industry that the implementation date for this initiative would be deferred to 1 January 2014 so that it would be appropriately sequenced with related reforms to capital standards in the other APRA-regulated industries. APRA is aiming to release a comprehensive consultation package, including draft conglomerate prudential standards, by the end of 2012.
Implementing Stronger Super reforms
In December 2010, the Government announced its Stronger Super reforms to strengthen the governance, integrity and regulatory settings of the superannuation system in Australia. The reforms were a response to the recommendations of the Review into the governance, efficiency, structure and operations of Australia's superannuation system (Cooper Review) delivered to the Government in June 2010. The Government announced its decisions on key design aspects of the Stronger Super reforms in September 2011.
The Stronger Super reforms envisage a strengthening of trustee duties, the establishment of a new superannuation product ('MySuper') and the streamlining of superannuation transactions ('SuperStream'). MySuper is intended to be a simple, cost-effective superannuation product that will take the place of existing default products; it will have a basic set of product features designed to aid comparability between products and reduce costs. SuperStream is intended to make the processing of superannuation transactions easier, cheaper and faster, provide better information to trustees, employers and fund members, and facilitate consolidation of unnecessary additional superannuation accounts.
Once the Stronger Super reforms were announced, APRA commenced a multi-year project that will result in significant changes to the prudential and reporting framework for superannuation. During 2011/12, APRA spent considerable time consulting with industry on various elements of the reforms and received feedback from a broad range of stakeholders.
Prudential standards
With the enactment of the Superannuation Legislation Amendment (Trustee Obligations and Prudential Standards) Act 2012 in September 2012, APRA has been granted power to make prudential standards in superannuation. This brings superannuation into line with the ADI and insurance industries, where prudential standards are the centrepiece of APRA's prudential framework. APRA's new standards-making power will strengthen the prudential regulation of superannuation trustees and the protection of fund member interests.
APRA's formal consultations on prudential standards began in September 2011 with the release of a discussion paper outlining proposals for prudential standards covering topics common to other APRA-regulated industries as well as topics specific to superannuation. Submissions from a wide range of stakeholders were supportive of APRA's objectives and the broad direction of the proposed prudential standards, including the range of topics.
In April 2012, APRA released its response to submissions on the discussion paper and 11 draft prudential standards. The standards common to other APRA-regulated industries covered governance, fit and proper, outsourcing, business continuity management, risk management, and audit and related matters. The superannuation specific standards covered investment governance, conflicts of interest, defined benefit funding and solvency, operational risk financial requirements, and insurance in superannuation. Again, submissions from a wide range of stakeholders were received; the majority of submissions expressed support for APRA's proposals and sought only minor changes to the provisions in the standards or requested clarity about APRA's intentions and expectations in some areas. A number of the submissions also suggested topics on which it would be desirable for APRA to issue guidance.
APRA expects to finalise the prudential standards in late 2012 with most provisions to come into effect on 1 July 2013. APRA also plans to commence consultations in late 2012 on draft guidance material to support the standards.
Reporting requirements
In response to the growing size and complexity of the industry, and to support implementation of the Stronger Super reforms, APRA plans a substantially enhanced superannuation data collection. APRA previously consulted on proposals for a revised data collection for superannuation in 2009 but put this project on hold pending the Cooper Review and the Government's Stronger Super reforms.
APRA resumed consultations on the revised superannuation data collection with the release of a comprehensive consultation package, including draft reporting forms, in September 2012. It expects to finalise its reporting requirements in early 2013. The proposed requirements implement the transparency and accountability elements of the Stronger Super reforms and also support the implementation of prudential standards, MySuper products and SuperStream. Overall, APRA expects that this new data collection will be of significant benefit to all industry stakeholders by providing greater transparency of investments and costs in superannuation and by enhancing APRA's ability to supervise trustees and funds.
MySuper and eligible rollover funds
Under proposed legislation, APRA is required to authorise Registrable Superannuation Entity (RSE) licensees to offer MySuper products. During 2011/12, APRA consulted on the proposed framework for MySuper authorisation and held a number of seminars, workshops and meetings with RSE licensees and other relevant stakeholders to facilitate the authorisation process. Subject to the passing of legislation, APRA expects to finalise the authorisation requirements in late 2012, with the application process to commence from 1 January 2013.
Similarly, under proposed legislation, an RSE licensee intending to operate an eligible rollover fund from 1 January 2014 must seek authorisation from APRA. In June 2012, APRA consulted on its proposed authorisation framework, which is aligned with the MySuper authorisation process; release of the final framework is expected in late 2012. Subject to the passing of legislation, applications for authorisation of eligible rollover funds can be submitted to APRA from 1 January 2013.
Review of superannuation guidance material
APRA is replacing the former Superannuation Circulars and guidance notes with prudential practice guides, as used in the other industries, to provide guidance material for trustees. Draft prudential practice guides are expected to be released for consultation in two stages, in late 2012 and early 2013. The first stage will focus on the key prudential practice guides that will support the implementation of the new prudential standards and Stronger Super reforms; the second stage will focus on the remaining areas of guidance related to these reforms.
In August 2011, APRA released for consultation two draft prudential practice guides on contribution and benefit accrual standards, and payment standards. This guidance material is separate from APRA's implementation of the Stronger Super reforms and updates the guidance that had been in place prior to commencement of trustee licensing in 2004. The two prudential practice guides were released in final form in April 2012 and took effect immediately upon release.
Authorised deposit-taking institutions
Financial Claims Scheme implementation
APRA has responsibility for administering the Financial Claims Schemes for the ADI and general insurance industries. The Scheme for the ADI industry (also known as the Early Access Facility for Depositors) provides depositors with timely access to, and certainty of repayment of, their deposit funds up to a defined limit. The limit was set at $250,000 per depositor per ADI from 1 February 2012, following a review by the Government. The new limit reflected advice from the Council of Financial Regulators that the limit should be set at a lower level (it was previously $1 million) to reflect the strength of the Australian banking system and its very sound positioning to meet the new Basel III global standards. There were no discernible changes in ADI depositor behaviour as a result of the reduction in the limit.
In its capacity as administrator, APRA has undertaken a number of measures to ensure that the Scheme can be operated effectively in the event of an ADI failure. Following consultation with the ADI industry and other parties, in December 2011 APRA released Prudential Standard APS 910 Financial Claims Scheme, which requires locally incorporated ADIs to generate deposit data and other information on a 'single customer view' basis. This is a fundamental requirement for the effective operation of the Scheme since it enables deposit balances to be aggregated across different protected accounts in the name of a single depositor. It is a prerequisite for accurate and prompt payouts.
ADIs will be required to comply with the prudential standard from 1 January 2014 unless, on a case-by-case basis, APRA grants particular ADIs an additional transition period (which cannot extend beyond 31 December 2015).
During 2011/12, APRA also discussed with the ADI industry and other parties some proposed additions to Scheme requirements. These relate mainly to the need for ADIs to be pre-positioned to facilitate prompt payment to, and effective communication with, depositors in the event that the Scheme is invoked. APRA also wishes to be able to regularly test ADIs' ability to comply with all aspects of the prudential standard. An amended prudential standard incorporating these proposals will be released for consultation later in 2012.
Covered bonds
In December 2010, in the context of its Competitive and Sustainable Banking System package, the Government announced that the Banking Act 1959 would be amended to allow ADIs to issue covered bonds. This amendment took effect in October 2011. Reflecting the change, APRA removed a prohibition on ADIs issuing covered bonds from Prudential Standard APS 120 Securitisation.
In November 2011, APRA released a discussion paper and draft prudential standard on covered bonds. The objective of this prudential standard is to ensure that ADIs issuing covered bonds appropriately manage the associated risks, including those to which they may become exposed via the covered bond special purpose vehicle (SPV). APRA proposed to require ADIs to identify the assets transferred to a covered bond SPV and whether those assets form part of the cover pool held as collateral against covered bonds, or are held by the covered bond SPV for other purposes. Although submissions argued otherwise, APRA believes it is essential from a prudential perspective that assets not in the cover pool be able to be claimed quickly by the ADI in the event of default, and this claim cannot be made if the assets are not individually identified. Submissions also raised a number of technical issues that were considered in finalising the standard.
The final Prudential Standard APS 121 Covered Bonds was released in July 2012 and commenced on 1 August 2012.
General insurance
General insurance Level 2 refinements
APRA proposed a number of refinements to the prudential and reporting framework for general insurance groups (Level 2 groups) in a discussion paper released in May 2011. The proposals made minor amendments to the Level 2 group prudential standards and aligned aspects of the reporting framework between Level 2 groups and individual APRA-regulated general insurers (Level 1 insurers).
The final prudential standards and reporting standards were released in October 2011. The first reporting under the revised framework was for the six-month period ending 31 December 2011.
International peer review
During 2011, APRA contributed to a country peer review of Australia under the FSB Framework for Strengthening Adherence to International Standards, which focusses on the implementation of financial sector standards and policies agreed within the FSB. In APRA's case, the peer review concentrated on the initiatives APRA had undertaken in response to the recommendations of the IMF's first Financial Sector Assessment Program (FSAP) review of Australia in 2005/06.
The report of the Peer Review of Australia, published in September 2011, concluded that the FSAP recommendations on ADI supervision had been largely addressed. The report noted that APRA has continued to promote effective risk management practices and strong capital reserves and to closely monitor the adequacy of ADIs' liquidity, and has improved its stress-testing capabilities. The report also noted that the regulatory and supervisory framework for general insurance has been considerably strengthened in recent years and that the introduction of insurance group supervision has enhanced APRA's ability to supervise the foreign subsidiaries of insurers domiciled in Australia.
In addition, the report noted that 'significant and commendable' progress has been made on failure resolution and crisis management, including the development of a crisis management framework, the establishment of the two Financial Claims Schemes and the strengthening of APRA's crisis resolution powers.
During 2011/12, APRA was actively involved in the IMF's second FSAP review of Australia, which focussed on the strength and stability of the Australian financial system and the quality of its regulatory architecture and financial supervision. As part of this review, APRA's supervision of the banking and the general and life insurance industries was evaluated against the Basel Committee's Core Principles for Effective Banking Supervision (for banks) and the International Association of Insurance Supervisors' (IAIS) new Insurance Core Principles, respectively. The IMF also conducted a macroeconomic stress test of the capacity of the Australian financial system to deal with certain shocks and reviewed Australia's crisis management arrangements, including the operation of the two Financial Claims Schemes. A background paper on Australia's financial stability arrangements, prepared for the FSAP by the Reserve Bank of Australia and APRA, was published in September 2012.
The IMF has yet to present its FSAP report on Australia to its governing body. Preliminary findings are that Australia has a sound and resilient financial system, supported by strong economic fundamentals and policies, intensive supervision and effective systemic oversight, and that there is a high degree of compliance with international standards. However, the IMF also noted that there were structural risks associated with the continued (though declining) use of offshore wholesale funding by the larger ADIs, the high level of household debt and house prices, and the concentration and interconnectedness of the Australian banking system. The IMF also echoed a concern voiced by APRA on a number of occasions that pressure on ADIs to preserve profitability in a slow credit growth environment may encourage greater risk-taking.
APRA-regulated institutions
  Number Assets ($ billion)1
  30 Jun 11 30Jun 12 % change 30 Jun 11 30 Jun 12 % change
ADIs2 177 174 -1.7 2,813.4 3,039.9 81
Banks 56 66 17.9 2,722.9 2,963.2 8.8
Building societies 10 9 -10.0 26.4 22.1 -16.3
Credit unions 103 92 -10.7 55.8 46.9 -15.9
Other ADIs, including SCCIs 8 7 -12.5 8.3 7.7 -7.2
Representative offices of foreign banks 18 17 -5.6      
General insurers 127 124 -2.4 115.0 118.2 2.8
Life insurers 31 28 -9.7 235.0 237.5 11
Friendly societies 14 13 -71 6.2 61 -1.6
Licensed trustees 225 209 -71      
Superannuation entities3 4,054 3,675 -9.3 810.6 832.5 2.7
Public offer funds 183 173 -5.5 619.2 644.0 4.0
Non-public offer funds 164 141 -14.0 183.9 180.8 -1.7
Small APRA funds 3,519 3,201 -9.0 2.0 2.0 0.0
Approved deposit funds 95 77 -18.9 0.2 01 -50.0
Eligible rollover funds 16 16 0.0 5.3 5.6 5.7
Pooled superannuation trusts4 77 67 -13.0 86.8 96.7 11.4
Non-operating holding companies 25 25 0.0      
Total 4,671 4,265 -8.7 3,980.2 4,234.2 6.4
1 Asset figures for end-June 2012 are based on most recent returns. Asset figures for end-June 2011 have been revised slightly from APRA's 2011 Annual Report in line with the audited returns received during the year.
2 The ADI classification does not include representative offices of foreign banks.
3 Superannuation entities comprise registered and unregistered entities. From 1 July 2006, all trustees operating APRA-regulated superannuation entities were required to hold an RSE licence and register their superannuation entities with APRA. A small number of unregistered entities are still in the process of winding-up or transferring trusteeship to an RSE licensee. The total for superannuation entities does not include uncontactable funds that are in the process of being formally wound-up or transferred to the Australian Taxation Office. As at end-June 2012, there were 11 such funds.
4 Pooled superannuation trust assets are not included in totals as these assets are already recorded in other superannuation categories.