In a letter to industry, APRA announced that it would begin using its new Supervision Risk and Intensity (SRI) Model from this month, with the new system expected to be fully implemented by June 2021. The SRI Model will replace the Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS) systems that APRA has used since 2002. To help the industry prepare for this transition, APRA has released an SRI Model Guide with more details on its design characteristics, along with a list of frequently asked questions (FAQs). APRA has also published its revised supervision philosophy, which sets out the supervisory approach used by the regulator in pursuing its mandate.
The SRI model assesses the level of prudential risk within the regulated entities across a number of (revised) risk categories and helps focus APRA’s resources to entities of greater risk. The model has three core elements: tiering, risk assessment, and staging. An entity’s tier reflects the potential impact that entity failure, imprudent behavior, or operational disruptions could have on financial stability, economic activity, and the Australian community. An entity’s tiering is significant in determining the level of supervisory attention required to ensure adequate identification of risks and follow up of actions:
- Tier 1—Individual entities that could have a large systemic impact.
Tier 2—Individual entities that could have a systemic impact.
Tier 3—Individual entities that are unlikely to have a systemic impact.
Tier 4—Individual entities that would not have a systemic impact.
SRI, which is a more contemporary model to its predecessor, has been developed to reflect the many changes in APRA’s regulated industries, environment, risks, and supervisory approach. APRA will use the SRI Model to assess the systemic significance of APRA-regulated entities and the level of risk each entity faces. These assessments will then guide the nature and intensity of the supervisory response of APRA. Governance, culture, remuneration, and accountability (GCRA), operational resilience, and cyber-security have increased in prominence and the focus on member outcomes in superannuation has become more acute. This has driven the need to review PAIRS and SOARS and develop a more contemporary model able to better respond to the changing landscape. The new SRI Model ensures greater elevation of non-financial risks while preserving the importance of financial resilience. It also introduces recovery and resolution considerations, in addition to more systematically factoring in the impact of the external environment on the risk profile of an entity. The new model better caters to industry nuances and is aligned with the enforcement approach of APRA to ensure a timely and appropriate supervisory response to identified risks.
The transition from PAIRS and SOARS to the SRI Model commences in October 2020 and will be completed by June 2021. APRA will commence a series of structured engagements in November 2020 to help the industry understand how the model works and what impact it may have on the level and intensity of supervision APRA applies. The move to the SRI Model could lead to a change in the intensity of supervision that APRA applies for some entities. This is a function of the additional risk categories, coupled with the enhanced assessment of systemic importance of entities and the consequent need for a more in-depth risk assessment. It is important, therefore, for entities to ensure that they understand how the model works. The guide to the SRI Model outlines the various risk categories, the risk-rating approach, and how this translates into supervisory intensity. Entities will be advised of the outcome of their SRI rating once this new risk assessment is completed. APRA will conduct a series of webinars in November 2020 to provide an overview of the new SRI model and answer any questions.
Keywords: Asia Pacific, Australia, Banking, Insurance, SRI Model, FAQ, Governance, Risk Takings, Systemic Risk, GCRA, APRA
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
Previous ArticlePRA Letter on Modifying Rule on Minimum Provisioning Requirements
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA published the annual report on asset encumbrance of banks in EU.
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.
ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans.