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Risk assessment and supervisory response tools

APRA relies on risk assessment and supervisory response tools known as the Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS).

These supervisory tools are the centrepiece of APRA’s risk-based approach to supervision and assist in:

  • making better and more consistent risk judgments;
  • responding quickly with supervisory action where necessary;
  • strengthening the ability of supervisors to take effective action; and
  • improving oversight and reporting on problem entities.

Probability and Impact Rating System

PAIRS is APRA’s risk assessment model and considers both the probability and impact of the failure of an APRA-regulated entity. It includes:

  • a common set of rating components for inherent risk, management and control, and capital support;
  • a structured process for combining these component ratings into a probability of failure rating; and
  • an impact rating scale.

All PAIRS risk assessments are maintained within a common database to enable analysis of trends in the level of perceived risk in particular segments and across APRA’s regulated population over time. The key components of the PAIRS tool are assessments of inherent risk, management and control, and capital support. It also allows supervisors to view the net risk position for each of the key risk types including strategy and planning, liquidity, operational, market and investment, credit, and insurance risks.

You can read more about PAIRS in the guide:


Supervisory Oversight and Response System

SOARS is used to determine the appropriate supervisory response based on PAIRS risk assessments. It is intended to ensure that supervisory interventions are targeted and timely. All APRA-regulated entities that are subject to PAIRS assessment are assigned a SOARS stance. Supervision responses can range from a normal cycle of review, to a heightened supervisory stance, to active preparation for non-viability.

SOARS comprises the supervision stances of Normal, Oversight, Mandated Improvement and Restructure:

  • Entities categorised as Normal are expected to remain able to meet their obligations to beneficiaries under reasonably foreseeable circumstances.
  • Entities categorised as Oversight are expected to remain able to meet their obligations to beneficiaries over the short to medium term, but aspects of their risk position may create vulnerabilities in adverse circumstances and require more extensive examination by APRA.
  • For entities in Mandated Improvement, APRA’s assessment is that aspects of the operations or circumstances of the entity potentially put beneficiaries and/or the financial system at risk, and therefore improvements are required.
  • Entities are categorised as Restructure when non-viability is assessed as imminent, and/or the entity poses an unacceptable risk to the financial system or to beneficiary interests. Such entities have not displayed a willingness and/or ability to rectify serious weaknesses, or to exit voluntarily in an orderly fashion.

Where entities are classed as Mandated Improvement under SOARS, APRA seeks to work with the institution to make improvements. In some circumstances under Restructure, APRA may seek to wind the entity up in a manner that best protects the interests of its depositors, policyholders or superannuation fund members. For more on this, see Resolution and Enforcement.

For read more on SOARS in the guide: