Banking (prudential standard) determination No. 3 of 2007 - Prudential Standard APS 110 - Capital Adequacy
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Attachment A
Extended Licensed Entity
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APRA may, subject to the specific requirements set out in paragraph 3 of this Attachment, allow an ADI[3] to treat one or more of its subsidiaries, other than an entity regulated directly by APRA or by an equivalent regulator overseas, as part of the ADI itself for the purposes of measuring the ADI’s capital adequacy and exposures to related entities. This requires APRA to adopt a “substance over form” approach and to “look through” the legal structure involved. Under this approach, an ADI and all its eligible subsidiary entities are “consolidated” to form an ELE for measuring the ADI’s capital adequacy and its exposures to all other related entities. Accordingly, the ADI’s exposures to these subsidiaries, including equity investments, are exempted from the ADI’s capital adequacy limits on equity and capital investments and intra-group exposure limits prescribed by APRA.
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An ADI may apply to APRA to have one or more subsidiaries approved as part of its ELE. APRA will seek to identify, in consultation with the ADI, entities that are eligible for approval as part of the ELE. An ADI must inform APRA as soon as it becomes aware that a member of the ELE no longer meets the criteria set out in this Attachment. A subsidiary that no longer meets the criteria will cease to form part of the ELE.
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APRA will, in deciding whether to approve a subsidiary of an ADI for inclusion within the ELE, have regard to the extent of the ADI’s control over, and integration with, the subsidiary as well as the existence of any third-party liabilities of the subsidiary. Potential complications that might arise if underlying asset holdings have to be liquidated during financial stress will also be considered. The following criteria must be met in respect of the relationship between the ADI and the subsidiary:
(a) the subsidiary is wholly owned by the ADI, with a Board that is composed entirely of members of the ADI’s Board or senior management;
(b) the ADI has complete information on the individual assets, liabilities and off-balance sheet positions of the subsidiary. The ADI must have access to the stand-alone accounting records for the subsidiary, and must be able to provide APRA with full and unfettered access to these and any other information at any time, including during on-site visits;
(c) the ADI has unrestricted control over the composition of the subsidiary’s assets and liabilities. The ADI must demonstrate to APRA that there are no legal or regulatory barriers, including cross-border issues where the subsidiary is not incorporated or established in Australia, to the transfer of any assets or funds back to the ADI. There must be no legal obstacle to the ADI instituting a wind-up of the subsidiary at any time and placing the remaining assets on the balance sheet of the ADI;