Level 3 assessmentLevel 3 assessment

Level 3 assessment

1. Only ADIs or authorised NOHCs prescribed, in writing, by APRA, and the conglomerate group that they head, will be subject to Level 3 capital adequacy assessment. A conglomerate group headed by a prescribed ADI or authorised NOHC will constitute a prescribed conglomerate group (PCG) for the purposes of this Prudential Standard. APRA will identify PCGs for which it considers Level 2 assessment to be insufficient 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. A prescribed entity (i.e. a prescribed ADI or prescribed authorised NOHC) must satisfy APRA that the PCG of which it is a part has sufficient capital (as defined in APS 111) for the risk profile of the group as a whole.

3. A PCG subject to Level 3 assessment must have a methodology, approved by APRA for measuring the group-wide capital adequacy that corresponds to its corporate structure. The methodology must have regard to all group members (whether ADIs, insurers or unregulated entities) and the capacity of any surplus capital to be transferred around the group according to need. The methodology may be based on the methodologies of the Joint Forum or the PCG’s own internal capital estimation and allocation models.

4. The policies with regard to group capital adequacy at Level 3, including the methodology used to measure capital adequacy of the entire group, must form part of an ICAAP for the PCG.

5. A prescribed entity must ensure that the ICAAP for the PCG is subject to effective and comprehensive review. The frequency and scope of the review must be appropriate to the PCG having regard to the size, business mix and complexity of the PCG’s operations and the nature and extent of any change to its business profile and risk appetite. The prescribed entity must, if requested by APRA, provide information on its ICAAP and any subsequent significant changes to its ICAAP.

6. In determining capital levels for the PCG, the Board of the prescribed entity must 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