The APRA Chair Wayne Byres spoke at the Annual Risk Management Association CRO Conference that was held in Sydney. He emphasized that that the theme of this event, which revolves around regaining the lost confidence in the financial sector, is both timely and important. He outlined the key regulatory and supervisory activities that APRA is pursuing to support and reinforce the efforts to restore the standing of the financial sector. He discussed the work of APRA in the areas of building an effective risk culture, implementing the Banking Executive Accountability Regime (BEAR), and setting out the remuneration requirements.
According to Mr. Byres, understanding the attitudes to risk—that is, the risk culture—is fundamental to gaining confidence that an institution has robust risk management and is likely to remain in a sound financial position. Traditional prudential requirements for adequate financial resources may not be sufficient if faced with poor governance, weak culture, or ineffective risk management. He mentioned that the early goal in the risk culture work, coinciding with the commencement of CPS 220 on Risk Management in January 2015, was to raise awareness of the issue. However, getting a good handle on the risk culture of an organization—particularly a large and complex one—is not easy. Following the publication of an October 2016 information paper on risk culture, a cross-sectoral pilot program of risk culture reviews commenced. The first attempts proved informative, but also resource-intensive. Unfortunately, it was concluded that they were not going to be scalable. Now, the pilot risk culture assessment program is being re-scoped to make it more usable on a wider basis within the overall supervisory framework. The executives and their Boards are expected to establish and maintain the risk culture that they consider to be appropriate to their organizations, given their strategy and risk appetite. As set out in CPS 220, it is the job of the Board—inevitably supported by management—to form a view about whether the risk culture is appropriate and to initiate changes if required.
The APRA Chair noted that BEAR formally came into effect on July 01, 2018 for the largest banks while other authorized deposit-taking institutions have until mid next year to get themselves ready. The major banks have identified and registered their accountable persons, developed reasonably detailed accountability statements, and from these put together accountability maps for their organizations. Returning to the theme of the event, Mr. Byres noted that BEAR will not necessarily aid the industry to regain the community’s trust, at least directly. Use of the enforcement provisions of BEAR will demonstrate to the community that there will be clear and material consequences for poor prudential outcomes. He further mentioned that one of the components within the BEAR that has attracted quite a bit of attention is the remuneration requirements, which come into effect during the course of 2019. The review of remuneration policies and practices across a sample of large APRA-regulated entities found that remuneration frameworks and practices across the sample did not consistently and effectively meet the objective of sufficiently encouraging behavior that supports risk management frameworks and long-term financial soundness. Mr. Byres also flagged the three key areas in which improvement is needed: outcomes, metrics, and oversight.
He mentioned, "....we intend to strengthen our prudential requirements in these areas......As senior leaders in the risk profession, I’d encourage you all to take a leadership role in this area to drive change. That will do far more to demonstrate a genuine commitment to regaining the trust than simply complying with new requirements imposed on you by regulators." Mr. Byres concluded that the efforts of the industry to strengthen risk culture, improve accountability, and develop more balanced performance measurement and remuneration practices are seen to be highly aligned with good prudential outcomes. However, increased regulation is an insufficient substitute for trust. It will ultimately be the industry’s collective behavior that determines the extent to which the trust and confidence of the community is regained.
Related Link: Speech
Keywords: Asia Pacific, Australia, Banking, BEAR, Risk Culture, Risk Management, CPS 220, Remuneration, APRA
HKMA announced the publication of a report on fintech adoption and innovation in the banking industry in Hong Kong.
BIS published a working paper that examines the drivers of cyber risk, especially in context of the cloud services.
ECB launched consultation on a guide specifying how the Banking Supervision expects banks to consider climate-related and environmental risks in their governance and risk management frameworks and when formulating and implementing their business strategy.
ECB published an opinion (CON/2020/16) on amendments to the prudential framework in EU in response to the COVID-19 pandemic.
EBA published a report that examines the interlinkages between recovery and resolution planning under the Bank Recovery and Resolution Directive (BRRD).
SRB published the final Minimum Requirements for Own Funds and Eligible Liabilities (MREL) policy under the Banking Package.
US Agencies (FDIC, FED, and OCC) published a final rule that makes technical changes to the March 31, 2020 interim final rule that provides a five-year transition period for the impact of the current expected credit loss (CECL) methodology on regulatory capital.
ECB published results of the March 2020 survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets.
FINMA published guidance (06/2020) on extending or discontinuing various exemptions that were granted due to the COVID-19 crisis.
SRB launched a consultation on the minimum data needed for valuation of a bank in resolution.