Responsibility for Capital ManagementResponsibility for Capital Management

Responsibility for Capital Management

1. Capital is the cornerstone of an ADI’s financial strength. It supports an ADI’s operations by providing a buffer to absorb unanticipated losses from its activities and, in the event of problems, enabling the ADI to continue to operate in a sound and viable manner while the problems are addressed or resolved. The Board of an ADI has the duty to ensure that the ADI maintains an appropriate level of capital commensurate with the level and extent of risks to which the ADI is exposed from its activities. To this end, the ADI should:

(a) have adequate systems and procedures in place to identify, measure, monitor and manage the risks arising from its activities on a continuous basis to ensure that capital is held at a level consistent with the ADI’s risk profile; and

(b) maintain and implement a capital management plan, consistent with the overall business plan, for managing its capital levels on an ongoing basis. Essentially, the plan should set out:

(i) the ADI’s strategy for maintaining capital resources over time, for example, by outlining its capital needs for supporting the degree of risks involved in the ADI’s activities, how the required level of capital is to be met, as well as the means available for sourcing additional capital where required; and

(ii) actions and procedures for monitoring the ADI’s compliance with minimum regulatory capital adequacy requirements, including the setting of trigger ratios to alert management of, and avert, potential breaches to the minimum capital ratios required by APRA.

2. Where an ADI is a member of a conglomerate group (see AGN 110.1), associations with other members in the group may expose the ADI to the potential of contagion risk – the possibility that difficulties encountered by individual entities in the group might be transmitted to the ADI (refer APS 222 – Associations with Related Entities). In determining stand-alone capital adequacy, the Board of the ADI should have regard to:

(a) group risks posed by other members in the group to the ADI;

(b) obligations (direct or indirect) arising from associations with group entities which might give rise to a call on the capital of the ADI; and

(c) the ability to readily extract capital from other members in the group should the need to recapitalise the ADI arise (this would include consideration of the integration of business within the group, the importance of subsidiaries to the group, the impact of taxation, regulatory requirements and other factors on the ability to realise investments in, or transfer surplus capital from, subsidiaries).