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APS 114 Standards/Prudential (Banking & Insurance) as made
This instrument determines Prudential Standard APS 114 Capital Adequacy: Standardised Approach to Operational Risk.
Administered by: Treasury
Made 29 Nov 2012
Registered 06 Dec 2012
Tabled HR 05 Feb 2013
Tabled Senate 05 Feb 2013

Banking (prudential standard) determination No. 7 of 2012

Prudential Standard APS 114 Capital Adequacy: Standardised Approach to Operational Risk

 

 

I, John Francis Laker, delegate of APRA:

(a)     under subsection 11AF(3) of the Banking Act 1959 (the Act) REVOKE Banking (prudential standard) determination No. 7 of 2007 including Prudential Standard APS 114 Capital Adequacy: Standardised Approach to Operational Risk made under that Determination; and

(b)     under subsection 11AF(1) of the Act DETERMINE Prudential Standard APS 114 Capital Adequacy: Standardised Approach to Operational Risk in the form set out in the attached Schedule, which applies to ADIs and authorised NOHCs to the extent provided in paragraphs 2 to 3 of the prudential standard.

This instrument takes effect on 1 January 2013.

 

Dated 29 November 2012

 

[Signed]

 

John Francis Laker

Chair

Interpretation

In this instrument:

ADI  is short for authorised deposit-taking institution which has the meaning given in section 5 of the Act.

 

APRA means the Australian Prudential Regulation Authority.

authorised NOHC has the meaning given in section 5 of the Act.

 


 

Schedule

Prudential Standard APS 114 Capital Adequacy: Standardised Approach to Operational Risk comprises the 6 pages commencing on the following page.


Prudential Standard APS 114

Capital Adequacy: Standardised Approach to Operational Risk

Objectives and key requirements of this Prudential Standard

This Prudential Standard requires an authorised deposit-taking institution using the standardised approach to operational risk to hold sufficient regulatory capital against those exposures.

The key requirements of this Prudential Standard are:

·                an authorised deposit-taking institution must divide its activities into three areas of business: retail banking, commercial banking and all other activity;

·                different operational risk capital requirements apply to each of the three areas of business; and

·                the total capital requirement for operational risk is the sum of the capital requirements calculated for each of the three areas of business.


Authority

1.             This Prudential Standard is made under section 11AF of the Banking Act 1959 (the Banking Act).

Application

2.             This Prudential Standard applies to all authorised deposit-taking institutions (ADIs) with the exception of :

(a)           foreign ADIs;

(b)          purchased payment facility providers (PPF providers); and

(c)           ADIs that have approval from APRA to use an advanced measurement approach to operational risk (AMA) under Prudential Standard APS 115 Capital Adequacy: Advanced Measurement Approaches to Operational Risk.

3.             A reference to an ADI in this Prudential Standard shall be taken as a reference to:

(a)           an ADI on a Level 1 basis; and

(b)          a group of which an ADI is a member on a Level 2 basis.

Where an ADI to which this Prudential Standard applies is a subsidiary of an authorised non-operating holding company (authorised NOHC), the authorised NOHC must ensure that the requirements in this Prudential Standard are met on a Level 2 basis, where applicable.

Interpretation

4.             Terms that are defined in Prudential Standard APS 001 Definitions appear in bold the first time they are used in this Prudential Standard.

Scope

5.             This Prudential Standard applies to all operations and activities of an ADI.

Definitions

6.             The following definitions are used in this Prudential Standard:

(a)           adjusted gross income - adjusted gross income is equal to total operating income from continuing operations excluding certain income items and excluding items for which operational risk regulatory capital is separately calculated by this Prudential Standard;

(b)          operational risk regulatory capital (ORRC) - the Regulatory Capital that an ADI is required to hold against its exposure to operational risk in accordance with this Prudential Standard.

Key principles

7.             For regulatory capital purposes, an ADI must divide its business activities into three areas of business:

(a)           retail banking;

(b)          commercial banking; and

(c)           all other activity.

8.             An ADI’s ORRC for the retail and commercial banking areas of business must be determined using a proportion of the ADI’s total gross outstanding loans and advances as an indicator of each area’s operational risk exposure. The ORRC for ‘all other activity’ is determined by using gross income, adjusted to exclude income primarily relating to retail banking and commercial banking (adjusted gross income).

Retail and commercial banking areas

9.             An ADI must be able to demonstrate to APRA that its ORRC for the retail or commercial banking areas of business adequately captures the operational risks associated with the activities to which these items relate.

10.         For the purposes of paragraph 8, an ADI’s total gross outstanding loans and advances is defined as the total on-balance sheet exposure to the following items, as reported in the ADI’s regulatory reporting returns provided to APRA under section 13 of the Financial Sector (Collection of Data) Act 2001:

Retail banking

(a)           cash holdings of notes and coins; and

(b)          loans to households.

Commercial banking

(a)           all deposits and amounts due from financial institutions;

(b)          subject to paragraph 12, securities held in the banking book; and

(c)           commercial lending.

11.         An ADI that has funded positions with respect to corporate finance activities, must exclude those positions for the purpose of measuring total gross outstanding loans and advances for the commercial banking area of business. In addition, the balances of loans and advances that are excluded from risk-weighted assets under Prudential Standard APS 120 Securitisation must also be excluded from total gross outstanding loans and advances for the retail banking and commercial banking areas of business.

12.         An ADI must, in calculating its total gross outstanding loans and advances within the commercial banking area of business, include the gross book value of securities[1] held in the banking book, excluding those arising from the ADI’s involvement in corporate finance activities and those that are deducted from capital (refer to Prudential Standard APS 111 Capital Adequacy: Measurement of Capital).

All other activity

13.         An ADI must, as an indicator of the operational risk exposure arising from all other activity, determine the capital requirement for that activity using adjusted gross income. Adjusted gross income may exclude irregular items but the amount must include income (including net interest income and servicing activities) from the ADI’s involvement in securitisation, trading[2] and corporate finance activities. In the absence of any adjustments, adjusted gross income will equate to total operating income from continuing operations.

Calculation of operational risk regulatory capital

14.         An ADI’s total ORRC must equal the sum of the average results for the areas of retail banking, commercial banking and all other activity as set out in paragraph 15 of this Prudential Standard. The component formulae are detailed in paragraphs 17 to 20.  

15.         The total ORRC is calculated as follows:

where:

KSA = the total ORRC under the standardised approach to operational risk

m = a fixed scaling factor of 0.035

LARt = total gross outstanding loans and advances (as defined in paragraphs 10 and 11) for the retail banking area of business measured at the end of each financial year and half-year of the ADI

LACt =  total gross outstanding loans and advances (as defined in paragraphs 10, 11 and 12) for the commercial banking area of business measured at the end of each financial year and half-year of the ADI

AGIt = adjusted gross income earned over a six month period at the end of each financial year and half-year of the ADI

t  = half-yearly observation period (at the end of each financial year and half-year of the ADI)

16.         An ADI must multiply KSA by 12.5 in order to convert the ORRC to a risk-weighted asset equivalent (refer to Attachment A to Prudential Standard APS 110 Capital Adequacy).

Retail banking area

17.         An ADI must calculate its ORRC for the retail banking area of business by:

(a)           taking the last six consecutive half-yearly balances of total gross outstanding loans and advances for the retail banking area of business;

(b)          multiplying 3.5 per cent of total gross outstanding loans and advances at each observation point, by a factor of 12 per cent, to produce a result in respect of each observation; and

(c)           determining an average half-yearly result.

Commercial banking area

18.         For the commercial banking area of business, an ADI must calculate its ORRC by:

(a)           taking the last six consecutive half-yearly balances of total gross outstanding loans and advances for the commercial banking area of business;

(b)          multiplying 3.5 per cent of total gross outstanding loans and advances at each observation point, by a factor of 15 per cent, to produce a result in respect of each observation; and

(c)           determining an average half-yearly result.

All other activity area 

19.         The ORRC for an ADI’s all other activity area of business must be calculated by:

(a)           taking the last six consecutive half-yearly amounts of adjusted gross income earned over a six month period;

(b)          multiplying adjusted gross income at each observation point by a factor of 18 per cent to produce a result in respect of each observation; and

(c)           determining an average full-year result.

20.         An ADI must, when calculating the three-year average for the all other activity area of business, set an observation to zero and include that zero observation in the numerator of the formula detailed in paragraph 15 if, for any given observation, the ADI’s adjusted gross income is negative.

Financial statements

21.         An ADI must reconcile, on a timely basis, the calculations set out in paragraphs 17 to 20 with its audited year-end financial statements and, where available, its half-yearly financial statements. The ADI may, with APRA’s prior written approval, use business estimates or forecasts when actual balances are not available (e.g. in the case of an ADI in its early years of operation). In the event of a merger, aggregated balances must be used unless otherwise agreed to by APRA.

 



[1]           A security for the purposes of this Prudential Standard includes all debt securities held in the banking book.

[2]           For trading activities, net income includes profits and losses on instruments held for trading purposes, net of funding costs, plus fees from wholesale broking.