• the stand-alone ADI - Level 1 capital is designed to deal with risks that directly impact only the balance sheet of an ADI;
• the consolidated banking group - Level 2 capital takes account of risks in non-banking subsidiaries, deducting these investments to determine the capital support available for the groups banking activities, and is similar to current capital arrangements which, in time, will align with the requirements of the new Basel Capital Accord;
• the full conglomerate group incorporating all associated entities - Level 3 capital allows more sophisticated methods to be applied, including the use of internal capital models. These will apply only to prescribed conglomerate groups where insurance or other non-banking activities form a large part of the groups activities, justifying a more complex supervisory treatment.

Initially, only six ADIs will be subject to Level 3 capital adequacy assessments including the Commonwealth Bank of Australia, Macquarie Bank, National Australia Bank, St George Bank, Suncorp Metway and Westpac Banking Corporation.

APRA is currently seeking information from these ADIs regarding their internal group capital methodologies, which will be assessed over the next year, coinciding with the initial assessment work relating to application of the Basel II Capital Accord. The new requirements will not apply to these groups until the methodology for measuring their capital adequacy has been agreed upon. In the interim, conglomerate exposures in these groups will remain subject to Level 2 requirements.

The new standards on Large Exposures and Associations with Related Entities will further reduce concentrations of risk in ADIs lending and investment activities, both to independent third parties and intra-group. The new intra-group limits will more effectively constrain the potential for risks in ADIs non-banking subsidiaries to impact on the ADI. Some ADIs have existing relationships that do not fully comply with these requirements and will take time to unwind. APRA is agreeing transitional arrangements with individual ADIs to allow these adjustments to be made in an orderly manner.

Mr Tom Karp, APRAs Executive General Manager  Diversified Institutions, said that Australian banks have more diversified conglomerate operations than most of their overseas counterparts.

It was necessary for APRA to complement its advanced integrated supervision approach with corresponding prudential policy requirements in this area.

Details on the implementation of the conglomerates policy were set out in APRAs letter to ADIs of 27 November 2002, which has resulted in a number of queries in respect of the interpretation of the revised standards. A copy of APRAs letter and a sample of questions frequently asked by ADIs, together with the regulators responses, are available on the APRA website on http://www.apra.gov.au/adi/Other-Information-for-ADIs.cfm