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
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
Previous ArticlePRA Letter on Modifying Rule on Minimum Provisioning Requirements
The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.
The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).
The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.
The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.
The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR).
The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED.
The Australian Prudential Regulation Authority (APRA) recently completed two pilot initiatives in its 2020-2024 Cyber Security Strategy, which was published in November 2020.
The Basel Committee on Banking Supervision (BCBS) published further information related to its 2021 assessment of global systemically important banks (G-SIBs), with additional details to help understand the scoring methodology.
The Financial Accounting Standards Board (FASB) is consulting on an Accounting Standards Update and the associated taxonomy improvements for requirements on troubled debt restructurings and vintage disclosures under the credit losses standard (for financial instruments) topic 326.
US Agencies issued a statement that summarizes the work undertaken during the interagency policy sprints focused on crypto-assets and provides a roadmap of future work related to crypto-assets.