APRA releases second consultation package for the supervision of conglomerate groups

The Australian Prudential Regulation Authority (APRA) has today released for consultation proposed risk management and capital adequacy requirements for the supervision of conglomerate groups.

Conglomerate groups, referred to as Level 3 groups, are groups comprising APRA-regulated institutions that perform material activities across more than one APRA-regulated industry and/or in one or more non-APRA-regulated industry.

The consultation package released today includes a response to submissions received on APRA’s March 2010 discussion paper on the supervision of conglomerate groups and a set of draft prudential standards. The package, on risk management and capital adequacy, complements the consultation package released in December 2012 on proposed requirements for group governance and risk exposures.

The proposed Level 3 framework will assist APRA to ensure that its supervision adequately captures the risks to which APRA-regulated institutions within Level 3 groups are exposed and which are not adequately covered by existing prudential arrangements for stand-alone entities (Level 1 supervision) and single industry groups (Level 2 supervision).

APRA Chairman Dr John Laker said that the introduction of a Level 3 framework in Australia is a significant progression of APRA’s prudential regime.

‘One of the key lessons from the global financial crisis is the need to enhance supervisory regimes to better capture the risks facing regulated institutions that are part of a wider conglomerate group.’

‘By implementing group-wide requirements on governance, exposure management, risk management and capital adequacy, APRA’s proposed Level 3 supervision framework will underpin a safer financial system in Australia,’ Dr Laker said. ‘At this stage, potential Level 3 groups are unlikely to need additional capital to meet the proposed Level 3 requirements.’

Submissions on the proposed risk management and capital adequacy prudential standards are due by 5 July 2013.

Over the course of 2013, APRA will consult on a set of prudential practice guides, reporting standards, reporting forms and instructions, and consequential amendments to other prudential standards that give effect to the Level 3 framework. The Level 3 prudential standards are expected to take effect from 1 January 2014.

The response paper and draft prudential standards can be found on the APRA website.