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Case study

This case study explores the risk-based supervision approach implemented by Australian regulators (ACCC, ASIC, APRA, RBA) to address anti-competitive behavior, market integrity, consumer protection, and prudential regulation of financial institutions. It discusses APRA's mission, objectives, framework, and the Probability and Impact Rating System (PAIRS) used for supervisory assessments. The Supervisory Oversight and Response System (SOARS) is also explained, highlighting the importance of taking appropriate supervisory action based on the assessment of failure likelihood and impact.

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Case study

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  1. Case study Risk-based supervision Background (an Australian view) San Jose 7 September 2011

  2. ACCC ASIC APRA RBA • Anti-competitive behaviour • Disclosure • Market integrity • Consumer protection • Corporations • Prudential regulation of financial institutions – banks, life insurers, non-life insurers, superannuation • Monetary policy • Stability of banking system • Payments system AustralianRegulators Four distinct regulators, each aligned to different potential sources of market failure 2 Risk based supervision

  3. APRA’s Structure APRA brochure Executive Group Supervision PRS Diversified Institutions Policy Supervisory Support Research Specialised Institutions Statistics 3 Risk based supervision

  4. Structure in the Context of Supervision Front-line Supervision Risk based supervision

  5. APRA’s Mission 5 Risk based supervision • APRA’s mission is to: • Establish and enforce prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by the institutions APRA supervises are met within a stable, efficient and competitive financial system

  6. Objectives of Supervision Ensuring the ability to meet financial promises Minimise failure – but do not guarantee zero failure Financial promises vary from industry to industry Must be prepared to intervene to protect beneficiaries’ interests Financial compensation schemes and government guarantees 6 Risk based supervision

  7. APRA’s Framework for Prudential Supervision 7 Risk based supervision • All activities, supporting procedures, processes, systems and guidelines that are used in forming risk assessments and supervision strategies • Central to supervision is entity risk assessment and appropriate supervisory outcomes • Form these views by undertaking: • APRA-initiated supervisory activities • Institution-initiated requests • Overall assessments of industries and the financial sector

  8. Supervision Cycle Supervisory activities Prudential Reviews, Prudential Consultations, financial and other offsite analysis, ongoing interaction, industry analysis, requests, licensing, enforcement Supervision outcomes and responses Entity risk assessment SOARS – Supervisory response Normal Oversight Mandated Improvement Restructure PAIRS Assessment of probability of failure Measurement of impact Appropriate supervisory action plan 8 Risk based supervision

  9. Probability and Impact Rating System (PAIRS) Dynamic risk assessment tool Determine the probability of failure, by rating Quality assessment Significance weight Measure the impact of potential consequences of failure Drives supervisory action 9 Risk based supervision

  10. Probability and Impact Rating System (PAIRS) 10 Risk based supervision • Assessments of: • Inherent risks • Management and control • Capital • All types of supervisory analysis and assessment have the potential to result in a revision to PAIRS

  11. Supervisory Oversight and Response System (SOARS) A result of the PAIRS assessment Determines the ‘supervisory stance’ for a regulated entity as: Ensure we take sufficient supervisory action based on our assessment of the likelihood and potential impact of failure 11 Risk based supervision

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