AGN 110.3 - Level 3 AssessmentAGN 110.3 - Level 3 Assessment

AGN 110.3 - Level 3 Assessment

1. Only ADIs prescribed by APRA will be subject to Level 3 capital adequacy assessment[3]. APRA will identify conglomerate groups for which Level 2 assessment is deemed not sufficient for measuring an ADI’s capital adequacy on a group-wide basis. These could be financial conglomerates containing substantial banking and insurance activity, or mixed conglomerates containing significant banking and non-financial activity.
2. ADIs subject to Level 3 assessment will need to have an APRA-approved, group-wide capital calculation that corresponds to their corporate structure. Essentially, the capital calculation should have regard to all group members (whether ADIs, insurers or unregulated entities) and the capacity of any surplus capital to be moved around the group according to need. The capital calculation may be based on the methodologies of the Joint Forum, or the ADI’s own internal capital estimation and allocation models. The ADI will need to satisfy APRA that the conglomerate group of which it is a part has sufficient capital (as defined in APS 111 – Capital Adequacy: Measurement of Capital) for the risk profile of the group as a whole.
3. Prescribed ADIs should provide to APRA a description of their current policies with regard to group capital adequacy at Level 3, including the methodology used to measure capital adequacy of the entire group.
4. In determining capital levels for the conglomerate group, the Board of an ADI that heads the group should have regard to:

(a) the potential for risk to compound across the group (as well as any proven benefits of risk diversification);

(b) concentration of capital and risk within individual entities in the group;

(c) the capital needs of individual entities in the group;

(d) the nature of capital held by the group, including its maturity, servicing costs and any double counting or upgrading of capital within the group;

(e) the ability to readily transfer surplus or free capital within the group and the type of capital which would be available to individual entities from other group members if required (this would involve consideration of the impact of taxation, regulatory requirements and other factors impinging on the ability to transfer surplus capital among individual entities); and

(f) the integration of business within the group and the ability of the group to readily realise capital through the sale of business lines and/or individual member entities without adversely impacting the group’s on-going operations.

5. Unlike Level 1 and Level 2 capital adequacy assessments, there would be no prescribed minimum capital adequacy requirements (such as the 8 per cent benchmark) for Level 3 assessment. Instead, ADIs prescribed under Level 3 would need to provide details of their own benchmarks (which might be regulatory minima or, for internal models, probability of default / time horizon parameters) and on an on-going basis, details of the extent to which these are exceeded by the conglomerate group. In instances where APRA is not satisfied with the group-wide assessment – for example, because the group’s internal benchmarks are deemed insufficiently prudent, or because APRA is not satisfied with the assumptions made (e.g. for diversification, or in relation to capital mobility) – APRA may impose additional or higher capital requirements on the ADI at Level 1 and/or Level 2.