Adoption of the internal model approachAdoption of the internal model approach

Adoption of the internal model approach

APRA will generally require an ADI that has model approval to apply this model across all relevant business activities of the ADI. APRA recognises, however, that for many ADIs it may not be practical to implement an internal model across all business activities. This may be the case, for instance, where an ADI undertakes a new business activity, has acquired a new business through merger or acquisition or has certain immaterial business activities (refer to paragraph 21 of this Prudential Standard). In such circumstances, APRA’s approval of the model may permit the ADI to use a combination of the internal model approach and an alternative APRA-agreed approach for regulatory capital purposes. This approach is referred to as ‘partial use’.
An ADI must provide APRA with appropriate written information, both at the time of the initial application for use of the internal model approach and subsequent to the ADI obtaining model approval, on the business activities for which the ADI proposes not to use its internal model approach.
Approval for partial use of an internal model approach will, at a minimum, require that:

1. all sources of IRRBB across the ADI are captured within its total amount of IRRBB capital requirement; and
2. a substantial majority of an ADI’s IRRBB is captured by its measurement system.

In the case of partial use of an internal model, diversification benefits for any part of the ADI’s operations that is excluded from the IRRBB measurement system will not be recognised.

APRA may approve partial use of an ADI’s internal model approach on a short-term basis. In this case, the ADI must adopt a phased roll-out of the internal model approach across all material business activities of the ADI. A phased roll-out may include (but need not be limited to) adoption of the internal model approach, in accordance with a specified timetable, across business activities within a particular legal entity or legal entities within the Level 2 group.
An ADI that has received approval to adopt a phased roll-out of the internal model approach must have a written APRA-approved implementation plan in place that specifies the extent and timing of roll-out of the internal model approach across all material business activities.
Permanent partial use of an internal model approach will be approved only in exceptional circumstances and where the ADI is able to demonstrate to APRA that those business activities to which the internal model does not apply are immaterial in terms of size and perceived risk profile. The calculated IRRBB capital requirement for such business activities, if considered necessary by APRA, may be subject to additional capital.