Application and review processApplication and review process

Application and review process

25. A regulated institution wishing to apply for approval to use the IMB Method must consult with APRA at an early stage. To assist APRA in assessing the readiness of a regulated institution to commence the approval process, APRA has developed a series of self-assessment indicators which are set out in Attachment A.

26. APRA will consider a regulated institution’s self-assessment without seeking evidence or verification (which occurs later in the application and assessment process). If the self-assessment reveals major deficiencies, APRA will advise the regulated institution of further progress that is needed before the regulated institution continues with the application seeking approval to use the IMB Method.

27. APRA’s approval to use the IMB Method to determine the prescribed capital amount will be subject to a comprehensive model review process including:

(a) submission by the regulated institution of a detailed application for approval, with comprehensive information about the ECM and RCM, its governance and use, and the risk management environment of the regulated institution; and

(b) one or more on-site visits by APRA to the regulated institution to discuss the detail of the ECM and RCM, risk management systems, and surrounding governance and organisational structure and controls.

28. If it is satisfied that the criteria specified in this Prudential Standard have been met, APRA will approve the use of the IMB Method and consequently the RCM to determine the regulated institution’s prescribed capital amount. Approval is given by APRA modifying relevant requirements in GPS 110 pursuant to section 32(3A) of the Act. Modification may include requirements to be met on a continuing basis, including specifying that the prescribed capital amount determined using the RCM will be subject to a minimum that is expressed as a percentage of the Standard Method calculation. During the first two years of the use of the IMB Method by a regulated institution, that minimum is to be 90 per cent of the amount determined using the Standard Method.

29. Use of the IMB Method does not relieve a regulated institution from complying with the following aspects of the capital standards:

(a) measurement of capital requirements as detailed in Prudential Standard GPS 112 Capital Adequacy: Measurement of Capital, including:

(i) the eligibility of capital instruments;

(ii) regulatory adjustments to the capital base; and

(iii) the minimum levels set out with respect to the types of capital used;

(b) asset risk charges on reinsurance assets related to a non-APRA-authorised reinsurer under the default module as specified in Prudential Standard GPS 114 Capital Adequacy: Asset Risk Charge; and

(c) the treatment of holdings in related companies representing retained profits that are equity accounted.

In order to avoid double-counting, any assets which are dealt with in accordance with paragraphs (a) to (c) above in the RCM, may be treated as risk-free or risk-reduced, in a manner agreed with APRA.

30. The RCM submitted to APRA for approval must include:

(a) an adequate specification of the version and assumptions of the relevant ECM;

(b) any particular parameters and other implementation rules applied in using the RCM to determine prescribed capital amount;

(c) any adjustments required to achieve consistency with the Standard Method as specified in paragraph 29;

(d) the addition of Standard Method prescribed capital amount calculations for any business segments or other elements of the prescribed capital amount calculation not included in the ECM;

(e) the procedure for determining the prescribed capital amount based on the RCM at reporting dates other than the date as at which the annual calibration is undertaken;

(f) the application of any minima or other conditions imposed by APRA; and

(g) any other relevant matters that APRA may require.

31. Once the modification under subsection 32(3A) comes into effect, the regulated institution must determine the prescribed capital amount in accordance with the approved RCM until APRA varies or revokes its approval.

32. APRA may, at any time by notice in writing to the regulated institution, vary or revoke its approval[5], including where APRA determines that:

(a) the regulated institution has not complied with this Prudential Standard; or

(b) it is appropriate having regard to the particular circumstances of the regulated institution to make the variation or revocation.

33. Where a regulated institution becomes aware that it is not complying with this Prudential Standard or with the modification of GPS 110, the regulated institution must as soon as practicable notify APRA and provide a plan for a timely return to compliance. Failure to notify APRA, provide an acceptable plan, satisfactorily implement the plan or demonstrate that the non-compliance is immaterial will result in reconsideration by APRA of the regulated institution’s eligibility to use the IMB Method. For the period of any non-compliance APRA may require the regulated institution to hold additional regulatory capital or take other action.