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Regulator considers lessons from the GFC

Alongside the Government’s release of their legislative roadmap earlier this week, the prudential regulator is also making a strong commitment to change.

The Australian Prudential Regulation Authority (APRA) has taken steps to ensure that authorised deposit taking institutions (ADIs) with outside interests outside have both the infrastructure and governance frameworks in place to mitigate ‘contagion’ risks.

“APRA has only limited visibility of these operations, which also fall outside the purview of foreign regulators. They complicate operating structures and there is no certainty their assets would be available to an ADI if it were to enter resolution. There are currently around 100 such operations within a small number of ADIs,” APRA Deputy Chair John Lonsdale said.

Earlier this week, APRA announced they have updated their prudential standard around Associations and Related Entities, and this is intended to reduce the risk of one corporate group having a detrimental effect on ADIs.

Lonsdale said the concessions in the existing legislative framework has allowed some ADIs to establish operations other jurisdictions.

He also indicated the standard took into consideration some of the lessons learnt from the global financial crisis—especially interesting, since the media has been full of news about ‘signalling’ in the markets that could predict the next major recession.

The key areas of focus will be:

  • a broader definition of related entities that includes board directors and substantial shareholders;

  • revised limits on the extent to which ADIs can be exposed to related entities;

  • minimum requirements for ADIs to assess contagion risk; and

  • removing the eligibility of ADIs’ overseas subsidiaries to be regulated under APRA’s Extended Licensed Entity framework.

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