APRA Issues Guidance on Indemnities in Divestment Transactions
In a letter to the authorized deposit-taking institutions, APRA issued guidance on the management of risks associated with indemnities in divestment transactions. The principles in the guidance on prudent management and oversight apply equally to all other APRA-regulated industries, where similar risks are faced. APRA expects the Board to review and approve, as part of the oversight of significant transactions, indemnities that give rise to a material contingent liability for an institution. The guidance specifies that an appropriate level of capital should be held for such risk exposures.
In recent months, APRA has been in discussion with several deposit-taking institutions on indemnities provided to acquiring entities as part of divestment transactions. While indemnities are not a new feature of merger and acquisition activity, their scope and nature appears to be shifting in focus, particularly as entities manage matters of conduct and customer redress. Without appropriate controls, these indemnities can expose institutions to potentially significant liabilities. Thus, APRA expects the following from the authorized deposit-taking institutions:
- Indemnities are capped and timebound, as uncapped indemnities are inconsistent with the prudential requirements for authorized deposit-taking institutions that prohibit unlimited exposures.
- Indemnity types are clearly distinguished, to reflect the difference in risk profile of the underlying exposures. This is important for identifying, recording, and monitoring the risk, capital treatment, and management approach.
- Governance arrangements and accountabilities are clearly defined and implemented to ensure appropriate oversight and controls around indemnities, both in setting them and monitoring and influencing the underlying risks post-transaction.
- Institutions should assess the need to provision for each material indemnity, both at inception and during the life of the indemnity, having regard to the likelihood that the indemnity will be called upon.
- Institutions must hold an appropriate and commensurate level of operational risk capital for the financial risks associated with indemnities. They should also engage APRA to demonstrate the appropriateness of intended operational risk capital treatment for current or prospective material indemnities. Where this does not appropriately reflect the level of risk, APRA will consider an adjustment to operational risk capital requirements
- Institutions should consider gaining independent assessment and validation of provisioning and capital for material indemnities.
Related Links
Keywords: Asia Pacific, Australia, Banking, Divestment Transactions, Governance, Operational Risk, Basel, Capital Requirements, APRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
FED Committees to Address Micro- and Macro-Prudential Climate RisksRelated Articles
EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
EBA Updates Lists of Entities for Use in Capital Calculations under SA
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
MAS Amends Notice on Related Party Transactions of Banks
MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.
ECB Amends Guideline on Euro Short-Term Rate
ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.
EBA Consults on Standards Related to FRTB-SA
EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).
PRA Proposes Rules Related to IRB Approach for Credit Risk
PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.
BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK
The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.
FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks
FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.
OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks
OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.
EU Amends CRR and Securitization Regulation in Response to Pandemic
To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).
