APRA's supervision in action: banks’ intra-group funding arrangements
In July 2019, APRA announced it required several banks to tighten the intra-group funding arrangements for their Australian operations.
Macquarie Bank Limited, Rabobank Australia Limited and HSBC Bank Australia Limited were advised they had breached APRA’s prudential standard on liquidity by describing the intra-group funding they received as “stable” (that is, that it cannot be readily withdrawn, other than at the contractual maturity of the facility). In fact, these banks had provisions in their funding agreements that would potentially allow the funds to be withdrawn in a scenario where the bank was facing financial stress – exactly the point at which stable funding was most valuable.
APRA initially identified the issue through its day-to-day industry supervision activities. Following a review of funding arrangements in the banking sector, APRA supervisors identified what appeared to be “non-standard” terms in borrowing agreements between the three banks and their related entities. After internal consideration and undertaking peer benchmarking to determine the seriousness and prevalence of the issue, APRA concluded that the banks had provisions in their funding agreements that were inconsistent with the requirements of APRA’s prudential framework.
Consistent with its new Enforcement Approach, APRA considered the range of tools available to intervene early and address this prudential risk. While each bank is financially sound, with strong liquidity and funding positions in the current stable environment, APRA chose to demand corrective action to prevent harm well before any threat to financial viability that might eventuate in a future stress scenario.
APRA required the banks to strengthen their intra-group agreements to ensure term funding would be stable in a financial stress scenario. APRA also required them to restate their past funding and liquidity ratios where these had been reported incorrectly, to provide transparency to market participants and the broader community. APRA supervisors are now considering a range of further options, including the imposition of higher liquidity requirements on these banks.
APRA decided to make this enforcement action public to provide transparency, influence industry behavior and ensure these kinds of funding arrangements are treated appropriately for regulatory purposes into the future. In making this decision, APRA judged that the announcement would not adversely impact the financial soundness of the institutions concerned, nor broader financial stability. APRA coordinated with other regulatory agencies as appropriate throughout the process and prior to making the announcement.
APRA also released additional information in the form of answers to Frequently Asked Questions to assist all ADIs to comply with APRA’s prudential standard on liquidity.
This article was published in APRA Insight - Issue 1 2019.