Responsibility for capital managementResponsibility for capital management

Responsibility for capital management

6. 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, enables the ADI to continue to operate in a sound and viable manner while the problems are addressed or resolved. The Board of directors (Board) of an ADI has a duty to ensure that the ADI maintains an appropriate level and quality of capital commensurate with the level and extent of risks to which the ADI is exposed from its activities. An ADI must have in place an Internal Capital Adequacy Assessment Process (ICAAP) that includes as a minimum:

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

(b) a capital management plan, consistent with the ADI’s overall business plan, for managing the ADI’s capital levels on an ongoing basis. Essentially, the plan must set out:

(i) the ADI’s strategy for maintaining adequate capital over time, including outlining its capital target for providing a buffer against the risks involved in the ADI’s activities, how the target level of capital is to be met and 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 to, and avert, potential breaches of these requirements.

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

8. An ADI that is a member of a conglomerate group (refer to Attachment B) could be exposed to risk, including contagion risk, through its association with other members in the group - that is, problems arising in other group members may compromise the financial and operational position of the ADI. The Board, in determining the capital adequacy of the ADI, must have regard to:

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

(b) obligations, both direct and indirect, arising from the ADI’s association with group entities that might give rise to a call on the capital of the ADI; and

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

9. An ADI that heads a conglomerate group, in addition to maintaining adequate capital for the ADI, must satisfy APRA that the group as a whole has a level of capital consistent with the group’s risk profile. To this end, the Board of an ADI that heads a conglomerate group must:

(a) establish policies on group capital adequacy (which have regard to the type and distribution of risk and capital resources held by the group) and implement a group capital management plan (with coverage similar to that outlined in paragraph 6(b)) to ensure that the group overall is adequately capitalised to cover its risks and to meet regulatory, market and strategic needs;

(b) ensure that appropriate systems and adequate procedures are in place to identify, assess, measure and monitor capital and group risks on a continuous basis; and

(c) ensure that the group has sufficient capital freely available to meet unexpected losses and adverse shocks impacting on the group.