Deputy Chairman, Australian Prudential Regulation Authority
President of International Organisation of Pension Supervisors (IOPS)
Lima, Peru
8 September 2011
• Introduction
• Continuous supervision process
• Range of supervisory activities
• PAIRS model
Framework
Main risk areas for PAIRS assessment
Net risk and significance weights
Impact rating
• SOARS model (next session)
• Adapting PAIRS for pension funds
• Ensuring quality and consistency
Supervision Activities
•
Prudential consultation
• Prudential reviews
• Targeted reviews
•Ad hoc meetings
Supervision Strategy
•
Supervisory action plans
Risk Assessment
•
Offsite analysis
• PAIRS Update
•
•
•
•
•
• Ratings tool used by APRA to determine the probability of failure of a regulated institution and the potential impact on the financial system of the failure.
• Five probability rating categories: Low; Lower-Medium; Upper-
Medium; High; and Extreme.
• Four impact rating categories (based on total assets): Low < $400m;
Medium - between $400m and $4.0bn; High - between $4.0bn and
$40bn; Extreme - above $40bn
• APRA assesses the likelihood of an institution’s failure based on the
“inherent risk” of the institution, balanced by the “management and controls” and the “capital support” available in the absence of
APRA intervention.
• Rating is based on the accumulated knowledge from APRA’s onsite reviews and offsite analysis
Rating Process
Measurement
Process
Descriptive Probability Rating
Probability Index
Impact Index
Descriptive Impact Rating
Supervisory
Attention Index
Supervisory
Stance
PAIRS
Board
Management
Risk Governance
Strategy & Planning
Liquidity Risk
#
Operational Risk
Credit Risk
Mk & Investment Risk
Insurance Risk
Capital - Coverage
Capital - Earnings
Capital – Access to Add
#
#
NOTE - For DC superannuation funds, the
Capital components do not apply
# NOTE - Significant risks for superannuation funds
NOTE – guidance manuals for supervisors on each
PAIRS component
Risk Category Principle Determinants Management + Control Assessment
Liquidity Risk
Operational Risk
Credit Risk
Market + Investment Risk
Awareness of liquidity risk by the Board
Liquidity management functions and committees (ALCO) in place
Policies and procedures relating to liquidity risk management
Limits in place and how they are reviewed and monitored
Scenario analysis and models used, including dependability of information sources
Reliability and extent of intra-group funding and standby facilities
Contingency arrangements in place
The awareness of operational risk by the Board
Operational risk management functions and committees
Policies and procedures
Controls in place across the IT environment
Management of operational issues including administration, outsourcing arrangements, fraud
Business continuity and disaster recovery plans, including testing processes and back up
The awareness of Credit Risk by the Board
The credit risk management framework, systems and delegations in place
Origination, security and collateral structures and valuation practices
Credit-related policies and procedures
Problem asset management including compliance with prudential requirements
Information systems and portfolio management
The role and functioning of independent credit review process
The awareness of maker an investment risk by the Board
Trading and investment functions, including segregation of responsibilities
ALCO and /or investment committees in place
Delegations and limits in place and how they are monitored and controlled
The process of reviewing and monitoring trading and /or investment strategies
Investment management and asset valuation practices
Market and investment policies and procedures including those relating to unit pricing
Models used, including underlying assumptions and stress analysis
The strength of management information systems
Independent review functions
EXAMINE FEATURES WHERE
LOW OPERATIONAL
RISK
FEATURES WHERE
HIGH OPERATIONAL
RISK
•Nature & Complexity
•Internal & External
Fraud
•IT Systems
•Business Disruption
•Board & Management
Awareness
•Operational Risk
Management
Framework
•Outsourcing
Arrangements
•Administration
•Information
Technology
•Business Continuity
Management
•Project
Management (IT)
•New & Varied
Products
•Independent
Review of
Operational Risk
• Simple legal & organisational structure, clear reporting lines
• No reliance on related entities for core or complementary activities
• No outsourcing of major business functions
• Simple products, low transaction volumes
• IT systems are simple, off-the-shelf, adaptable
• Minimal disaster threat from external activities
• No reliance on a key person
•Complex structure, unclear reporting lines
•Extensive reliance for core or complementary activities on related entities not wholly owned within the same group
•Outsourcing to unrelated third parties with history of unresolved problems
•Complex business, many products, high volume
•IT systems unable to meet business needs, inherited
/ legacy systems
•Vulnerable to external disaster
•Heavy reliance on one person
PAIRS Category
Board
Management
Risk Governance
Strategy and Planning
Liquidity Risk
Operational Risk
Credit Risk
Market and Investment
Risk
Insurance Risk
Net Risk Total
Coverage/ Surplus
Earnings
Access to Additional
Capital
Capital Support Total
Overall Risk of Failure
Inherent Risk
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
Management and
Control
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
Net Risk
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
(0-4)
Significance
Weight
%
%
%
%
%
%
%
%
%
100%
%
%
%
100%
Size, measured by assets under management, is the sole determinant of impact
Asset ranges $0 ≤ x < $400m
Impact Rating Low
$400m ≤ x < $4b
Medium
$4b ≤ x < $40b
High x ≥ $40b
Extreme
NOTE: Impact rating drives frequency of review
NOTE: Impact rating determines whether specialist risk experts join supervision staff in review of institution
Normal On going collection and analysis of data supported by routine prudential reviews on a cyclical basis.
Oversight
Mandated
Improvement
Restructure
Significant increase in supervision intensity however entity is not considered likely to fail. More frequent information and visits.
Board and senior management given strong signals of concern.
Entity produces and executes a remediation plan. Transitional classification. Either improve or exit the industry.
Entities have failed or are about to fail.
Full use of supervisory and legislative powers to protect beneficiaries.
Dedicated support unit for supervisors
Predictive analysis tools
Portfolio reports and watch lists
Peer review and assessment
Reporting changes in assessment to top management in APRA
The combination of these four support levels and the reporting framework leads to better risk assessments and strategy setting practices in APRA and overall improvements in supervisory judgements.
• Individual supervisor inputs scores for risk categories + mitigants and decides on weightings
• Guided by benchmarks / reference points
• Supervisors may have to defend their ratings at a review panel