APRA issued a letter to all authorized deposit-taking institutions expressing concerns about their increasing exposure to the funding agreements with third-party lenders, including peer-to-peer (P2P) lenders. APRA undertook two data collection exercises to assess the nature and size of exposures of "small-medium sized authorized deposit-taking institutions" to third-party lenders. A review of a sample of funding arrangements to P2P lenders was also conducted to understand the risks arising from these arrangements, along with the authorized deposit-taking institutions’ management of those risks.
The letter shares some high-level observations from the thematic review and clarifies how authorized deposit-taking institutions should treat these exposures for APRA reporting purposes:
- Strategic Considerations and Due Diligence. APRA observed that some authorized deposit-taking institutions lacked a well- thought-through or defined strategic rationale for funding third-party lenders and conducted little to no due diligence prior to committing to these arrangements. APRA expects all authorized deposit-taking institutions to have an adequate approval process for new business initiatives while ensuring that risks are identified, understood, and well-managed.
- Risk Appetite Metrics and Monitoring. APRA expects all authorized deposit-taking institutions to establish risk appetite metrics to manage concentration to individual third-party lenders as well as an aggregate concentration metric reflecting all third-party arrangements. In addition, APRA expects that authorized deposit-taking institutions manage their third-party lending risk exposures through the incorporation of targeted risk metrics and controls that can measure the quality and ongoing performance of the loans originated by lenders.
- APRA Reporting of P2P Exposures. APRA observed an inconsistent approach in how authorized deposit-taking institutions classify P2P funding exposures (loan exposures versus investment securities). APRA reviewed the nature of the funding arrangements provided to some P2P lenders and determined that these exposures should be recorded as loan exposures in APRA returns—namely, Reporting Form ARF 320.0 on Statement of Financial Position (Domestic Books) and Reporting Form ARF 323.0 on Statement of Financial Position. Authorized deposit-taking institutions are expected to assess the appropriate reporting treatment and consult with their responsible supervisor. APRA expects authorized deposit-taking institutions to calculate their large exposures to P2P lenders as set out in the new Prudential Standard APS 221 on Large Exposures.
- Provisioning for P2P Exposures. An authorized deposit-taking institution must report specific provisions and General Reserve for Credit Losses (GRCL) that, together, are adequate at all times to absorb credit losses in the authorized deposit-taking institution's business. APRA observed inconsistency in how the authorized deposit-taking institutions apply specific provisioning methodologies for P2P exposures outlined in Prudential Standard APS 220 Credit Risk Management.
Authorized deposit-taking institutions are required to consult with their responsible supervisor before entering into third-party loan arrangements. As third-party lenders have varying structures, the APRA reporting approaches outlined above may not always be appropriate to all arrangements. It is the responsibility of an authorized deposit-taking institution to ensure that exposures are reported correctly.
Related Link: APRA Letter (PDF)
Keywords: Asia Pacific, Australia, Banking, Credit Risk, Third Party Lenders, P2P Lending, APS 221, APS 220, Reporting, Large Exposures, AASB 9, APRA
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
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